What principle underlies the income capitalization approach?

The income capitalization approach is fundamentally grounded in the principle of anticipation. This approach values a property based on the income that it is expected to generate in the future. It recognizes that the value of a property is linked to the present worth of its anticipated future income streams. Investors base their purchasing decisions not only on current income but also on expectations for future performance and growth.

The anticipation principle emphasizes the importance of forecasting future income and discounting that income to its present value to determine what an investor might be willing to pay for the property today. Through this method, appraisers can derive a value that reflects both the property’s ability to generate income and the risks involved in those future earnings.

The other principles listed, such as substitution, the cost approach, and sales comparison, focus on different valuation methods that do not inherently center on the expected future income of the property. Each method has its own application but does not capture the essence of the income capitalization approach as closely as the principle of anticipation does.