Which approach is used to estimate the value of a property's net earning power?

The Income Approach is the method used to estimate the value of a property's net earning power. This approach is particularly relevant for investment properties, where the focus is on the income generated, such as rental income, rather than just the property's market value or the cost to construct it.

By capitalizing the net operating income (NOI), which is the income generated after deducting operating expenses, the Income Approach provides a clear picture of the property’s ability to generate cash flow. Appraisers will often apply a capitalization rate, which reflects the return on investment that a buyer expects, to arrive at an estimate of the property’s value based on its income-producing potential.

Other approaches, such as the Market Approach and the Cost Approach, serve different purposes. The Market Approach compares similar properties that have recently sold to determine a fair market value, while the Cost Approach assesses how much it would cost to replace the property minus depreciation. The Comparative Approach is essentially a variation of the Market Approach, reinforcing the idea that the value can differ based on market conditions and specific property characteristics. However, none of these approaches focus directly on the property’s ability to earn income as the Income Approach does.