What type of property utilizes the capitalization approach for appraisal?

The capitalization approach is primarily used for appraising income-producing properties. This method evaluates a property’s ability to generate income, focusing on its potential revenue and the expenses associated with maintaining it.

When appraisers use the capitalization approach, they often calculate the net operating income (NOI) of the property, which is the total rental income minus operating expenses. This figure is then divided by the capitalization rate, which reflects the expected return on an investment in real estate. By applying this technique, appraisers can estimate the property's market value based not on comparable sales or construction costs, but rather on its income-generating capabilities, making it particularly suited for commercial and rental properties.

Single-family homes and vacant land typically do not produce consistent income streams that are necessary for the capitalization method. Instead, their valuations are often based on comparable sales or cost approaches, which consider past sale prices and land development costs, respectively. Commercial properties can also fall under the income-producing category, but since the correct choice is broader and applies to all types of income-generating real estate, the best answer emphasizes the general category of income-producing property.