How does one determine the annual net income in the capitalization approach?

In the capitalization approach to real estate appraisal, determining the annual net income is vital, as this figure is used to estimate the value of an income-producing property. The correct method involves calculating total income minus total expenses. This approach gives a clear representation of the property's profitability by factoring in both revenue generation and the costs associated with operating the property.

Total income can include all possible revenue from rent, lease agreements, and other income-generating activities. From this gross income, all operating expenses—such as maintenance, property management fees, taxes, insurance, and utilities—are subtracted to arrive at the net income. This net income reflects the actual financial performance of the property and serves as the foundation for applying a capitalization rate to calculate the property's value.

While averaging past income, projecting future income, or assessing market trends can provide helpful context and insight into a property's performance or expected income potential, they do not directly produce the annual net income used in the capitalization formula. This makes the calculation of total income minus total expenses the most direct and relevant method for determining net income in this appraisal approach.