What is the income capitalization approach and when is it used?

The income capitalization approach estimates property value by dividing the net operating income by a capitalization rate. Net operating income is gross rental income minus vacancy losses and operating expenses, excluding mortgage payments. The capitalization rate reflects the expected rate of return for similar investments in the market. For example, a property generating 50,000 dollars in net operating income with a market cap rate of 8 percent would be valued at 625,000 dollars.