What is the first step in the income capitalization approach?

In the income capitalization approach, the first step is to estimate potential gross income. This estimation is crucial because it lays the foundation for determining the property's ability to generate revenue. Potential gross income represents the total income a property could produce if it were fully rented and all units were occupied.

Estimating this figure involves analyzing rental market conditions, understanding comparable rents in the area, and considering factors such as the type of property and its location. This step is vital because it informs all subsequent calculations in this approach, including deductions for vacancies and operating expenses.

Without an accurate estimate of potential gross income, the rest of the income capitalization process—such as calculating net operating income or determining the capitalization rate—would not be based on a solid understanding of the property’s income-generating capabilities. Thus, beginning with estimating potential gross income ensures that later calculations reflect the realistic income scenario for the property.