Which component in the income approach allows for estimating market value?

The income approach to valuation is primarily used for properties that generate rental income, such as commercial real estate or investment properties. Within this approach, Net Operating Income (NOI) plays a crucial role.

NOI is calculated by taking the total income generated from the property and subtracting operating expenses (excluding debt service). This figure serves as a foundation for determining the property’s potential profitability and, by extension, its market value. By capitalizing the NOI using an appropriate capitalization rate, appraisers can estimate the market value of the property. This process reflects the relationship between income generation and value, making NOI a fundamental component in estimating market value through the income approach.

The other options do not serve this specific function within the income approach. Comparative Market Analysis generally involves examining sales data from comparable properties to determine value, rather than focusing on income potential. Cost of Construction relates more to the replacement or reproduction cost of a property, which is part of the cost approach to valuation. Assessed Value represents the value assigned by a taxing authority for taxation purposes and may not accurately reflect market values or the income potential of an investment property.