Which method uses annual net income to estimate a property's value?

The method that utilizes annual net income to estimate a property's value is known as the capitalization technique, commonly referred to as the CAP technique. This approach relies on the principle that the value of an income-generating property is derived from the income it produces.

To use this method, one would typically divide the net operating income (NOI) of the property by the capitalization rate (cap rate), which reflects the expected rate of return on investment in the market. This method is particularly useful in commercial real estate, where properties are often valued based on their income-generating potential rather than by comparable sales.

For example, if a property generates an annual net income of $50,000 and is expected to have a cap rate of 5%, the property's estimated value would be calculated as $50,000 divided by 0.05, resulting in a value of $1,000,000. This technique emphasizes the significance of income in determining property value, distinguishing it from other valuation methods that may focus more on comparative analysis of similar properties or projected future cash flows.