According to the capitalization approach, how is the present worth of future benefits established?

The capitalization approach to real estate valuation centers on determining the present worth of a property based on the income it generates. Specifically, this approach involves forecasting the income that a property is expected to produce in the future. By estimating the anticipated cash flows from rental income or other revenue sources, an appraiser can develop a capitalization rate, which is then used to discount this future income back to its present value.

This process is crucial because real estate is typically considered an investment, and potential buyers are primarily interested in the income-producing potential of a property. By focusing on the future benefits, the capitalization approach provides a clear understanding of the property's value in terms of its income-generating ability, making it an essential method in real estate appraisal.

Utilizing projections of expected income allows appraisers to provide a valuation that reflects the property's ability to generate cash flow, thereby aligning value determination with the investment perspective of most real estate transactions.