Which appraisal approach is used to value income properties by capitalizing net operating income (NOI)?

• A. Income approach
• B. Sales comparison approach
• C. Cost approach
• D. Replacement approach

Answer: (A)

Capitalizing net operating income is used because it translates a property's ability to generate income into value. Net operating income is the annual income left after operating expenses and vacancies, excluding debt service and taxes. By applying a capitalization rate to NOI (Value = NOI ÷ cap rate), you estimate the property's value based on the income it produces. This approach is ideal for income-producing properties where value hinges on future cash flow.

The other approaches are not based on capitalizing NOI: the sales comparison method uses prices of similar recently sold properties; the cost approach estimates value from the cost to reproduce or replace the property minus depreciation; the replacement approach is a form of cost-based valuation focusing on functional adequacy rather than income.