What formula is commonly used in the Income Approach?

The Income Approach is a method used to estimate the value of an income-producing property based on the income that the property generates. The correct choice, which involves Net Operating Income (NOI) divided by the capitalization rate, is fundamental in this approach.

Net Operating Income represents the total revenue generated from the property minus all reasonable operating expenses. It reflects the property's profitability and is a crucial indicator of its financial performance. Once you have the NOI, dividing it by the capitalization rate—a measure of the return on investment expected by investors—allows you to estimate the property's value. This formula essentially helps to convert the anticipated income into an indicative value, making it a core principle in property valuation.

Other options presented, while they deal with various aspects of real estate finance, do not capture the essence of the Income Approach as effectively as the correct choice does. For instance, simply dividing expenses by total income does not directly relate to property value determination. Multiplying the sales price by rental yield might provide some insights, but it doesn't specifically address the Income Approach formula. Lastly, calculating monthly rent and annualizing it doesn't account for the operating expenses and expected returns that the capitalization rate provides.