Which approach to real estate valuation focuses on the income generated by a property?

The Income Approach to real estate valuation is specifically designed to evaluate the value of a property based on the income it generates. This method is particularly useful for investment properties, such as multifamily units, commercial real estate, and rental properties. The valuation involves calculating the net operating income (NOI) of the property, which is the total income expected from the property after all operating expenses have been deducted.

Once the NOI is determined, it's capitalized using a rate of return that reflects the risk associated with that investment. This process allows appraisers to derive an accurate and market-relevant value for income-producing properties, making it the go-to method for investors seeking to understand the financial performance and potential of a property.

Other approaches, like the Sales Comparison Approach, which looks at recent sales of comparable properties, and the Cost Approach, which assesses the cost to replace or reproduce the property, do not focus specifically on income as the primary driver for valuation. The Replacement Approach, though similarly aimed at determining cost, does not directly relate to how current income-producing properties are valued, thereby distinguishing the Income Approach as the correct response to the question.