What approach is commonly used to determine the rental value of an investment property?

The income approach is commonly used to determine the rental value of an investment property because it directly assesses the potential income that the property can generate. This method focuses on the income-producing capabilities of the property, particularly relevant for investment properties where rent is a primary revenue stream.

By analyzing the net operating income (NOI)—which considers the total rental income minus operating expenses—investors can estimate what a property will realistically yield in rental income. This assessment allows property owners and investors to make informed decisions regarding pricing, valuation, and investment strategies based on the income the property can generate, rather than simply its physical characteristics or comparative market data.

In contrast, the cost approach estimates value based on the cost to replace or reproduce the property, while the replacement cost approach specifically assesses the cost of constructing a similar property. Both of these methods are less suited for determining rental value directly, as they do not take rental income into account as a primary factor. The market comparison approach examines sales of similar properties to estimate value, which is also less focused on specific rental income potential.