Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

Which approach is most commonly used for valuing income-producing properties?

1. Sales comparison approach

2. Cost approach

3. Income capitalization approach

4. Market trend analysis

The correct answer is: Income capitalization approach

The income capitalization approach is the most commonly used method for valuing income-producing properties because it directly focuses on the ability of the property to generate income. This approach involves estimating the future income that a property will produce and converting that income into present value through capitalization rates. Investors and appraisers prefer this method because it reflects the financial performance of a property, which is crucial for making investment decisions. It takes into account all revenue streams, including rent and additional income sources, and deducts operating expenses to assess the net operating income (NOI). The capitalization rate, which is derived from market data, is applied to the NOI to determine the property's value. This method is particularly effective for commercial properties like apartment complexes, office buildings, and retail spaces, where income generation is the primary indicator of value and profitability.