When using the income approach, what is typically the first step in the valuation process?

In the income approach to property valuation, the first step typically involves estimating the net operating income (NOI). This step is crucial because the income approach focuses primarily on determining the potential income a property can generate.

Estimating the NOI requires analyzing the expected rental income and subtracting operating expenses such as maintenance, property management, insurance, and taxes. This figure represents the income available to the property owner and serves as a foundation for the valuation process.

Once the NOI is established, it can then be used in subsequent steps, such as determining the capitalization rate, which reflects the return expected by an investor. By clearly understanding the property's income-generating potential through the NOI, appraisers can make informed decisions about how to proceed with the valuation. This step sets the stage for evaluating the investment's financial viability, thus making it integral to the income approach.