In the Income Approach, which income is used to determine market value?

In the Income Approach to appraisal, Net Operating Income (NOI) is used to determine market value because it reflects the income generated by a property after deducting operating expenses. This approach is based on the premise that the value of a property is derived from the income it can produce over time.

NOI is calculated by taking the total revenue that a property generates, such as rental income, and subtracting all necessary operating expenses, including maintenance, property management fees, insurance, and taxes. This yields a clearer picture of the actual income that an investor can expect to receive from the property, which is crucial for making informed investment decisions.

Using gross income or scheduled income does not account for the expenses that can significantly affect cash flow and profitability. Similarly, potential income refers to the maximum income a property could generate if fully occupied and operating at optimal conditions, which may not be realistic. Therefore, net operating income provides the most accurate and reliable measure of a property's performance and market value within the context of the Income Approach.