What is the purpose of Direct Capitalization in real estate?

The purpose of Direct Capitalization in real estate is to convert annual income into an estimate of property value. This method involves calculating the present value of a property's expected income stream. It typically applies to income-producing properties such as commercial real estate, multifamily units, or any property that generates rental income. By applying a capitalization rate, which reflects the risk and return expectations of investors, assessors can derive an estimated market value for the property based on its income-generating potential.

This approach is particularly valuable for assessors because it allows them to provide a well-reasoned and quantifiable valuation based on market data rather than relying solely on comparative sales or other more subjective methods. This valuation method simplifies the analysis by focusing on income, making it a crucial tool in the assessment process.