What method estimates property value based on its income-generating potential?

The method that estimates property value based on its income-generating potential is the Income Approach. This approach is particularly applicable to investment properties, such as apartment buildings or commercial real estate, where the income produced by the property is a critical factor in determining its value. By calculating the net operating income (NOI) and applying a capitalization rate (cap rate), appraisers can determine the present value of future income streams generated by the property.

The focus of the Income Approach is on the financial return the property can generate rather than just its physical attributes or comparable sales, making it the preferred method for income-producing real estate. This reliance on the income highlighted by the approach allows investors to evaluate the potential return on investment, which is essential in making informed purchasing decisions.