Capitalization is the term or the process in which there is an addition of the interest which is unpaid to the principal amount of the loan. And the principal or the original amount of the loan increases or rises when the payments got postponed during the deferment periods and then the interest which is unpaid is capitalized.
So, it will be capitalized whether or not there is particular or the specific amount of borrowing for the construction.
Base on the scenario been described in the question, we can say that the approach the real estate professional used and is most applicable when valuing an owner-occupied residential house is income approach
The income approach, or the income capitalization approach, is a type of real estate appraisal method that allows investors to estimate the value of a property based on the income the property generates to them. It’s used by taking the net operating income (NOI) of the rent collected by the investors and dividing it by the capitalization rate. Which will give us the income approach