What is the first step in the income approach to property valuation?

In the income approach to property valuation, the first step involves estimating potential gross income (PGI). This estimate is critical as it reflects the income a property would generate if it were fully leased at market rents, without considering vacancies or collection losses. It serves as the foundation for the entire income approach, allowing assessors to project the property's value based on its income-generating capabilities.

By determining PGI first, assessors can more accurately calculate net operating income (NOI) and subsequent cash flows. Understanding the maximum earning potential of the property informs all later calculations and adjustments, including operating expenses and miscellaneous income. Once PGI is established, it sets the stage for further analysis involving costs and cap rates in determining the overall value of the property.

Other options, while important in the process, naturally follow the estimation of PGI. Operating expenses cannot be estimated until the potential income has been defined, and minor sources of income would be factored in later once the core income has been established. Similarly, selecting a cap rate is a subsequent step that requires the initial income figures to ensure an accurate valuation. Thus, starting with the estimate of potential gross income is the logical first step in the income approach.