RAA RAA Income Approach & Valuation Methods 1 — Questions and Answers
Question 1: In the income approach, what does Gross Rent Multiplier (GRM) represent?
- The ratio of property value to annual gross rent (Correct answer)
- The ratio of net operating income to property value
- The ratio of effective gross income to vacancy rate
- The ratio of operating expenses to gross income
Correct answer: The ratio of property value to annual gross rent
GRM is calculated by dividing the property's sale price by its annual (or monthly) gross rent, giving a quick value estimate.
Question 2: Which term describes the annual income a property would generate if fully occupied with no vacancy or credit losses?
- Effective Gross Income
- Potential Gross Income (Correct answer)
- Net Operating Income
- Adjusted Gross Income
Correct answer: Potential Gross Income
Potential Gross Income (PGI) is the maximum rental income assuming 100% occupancy and full rent collection.
Question 3: When appraising a single-family rental home, what is subtracted from Potential Gross Income to arrive at Effective Gross Income?
- Operating expenses and reserves
- Debt service payments
- Vacancy and collection loss allowance (Correct answer)
- Capital expenditure reserves only
Correct answer: Vacancy and collection loss allowance
Effective Gross Income equals PGI minus a vacancy and collection loss allowance, reflecting realistic income.
Question 4: The capitalization rate (cap rate) in the income approach is best defined as:
- Net Operating Income divided by property value (Correct answer)
- Gross rent divided by purchase price
- Net income after debt service divided by equity
- Total income divided by total expenses
Correct answer: Net Operating Income divided by property value
Cap rate = NOI ÷ Value, and it reflects the relationship between a property's income and its market value.
Question 5: In residential appraisal, when using the income approach, which operating expenses are typically excluded from the NOI calculation?
- Property taxes and insurance
- Maintenance and repair costs
- Mortgage payments (debt service) (Correct answer)
- Property management fees
Correct answer: Mortgage payments (debt service)
Debt service (mortgage payments) is a financing cost, not an operating expense, and is excluded from the NOI calculation.
Question 6: A residential property has a monthly market rent of $2,400 and recently sold for $336,000. What is the monthly GRM?
- 120
- 140 (Correct answer)
- 160
- 180
Correct answer: 140
$336,000 ÷ $2,400 = 140, which is the monthly Gross Rent Multiplier.
RAA RAA Income Approach & Valuation Methods 1
In the income approach, what does Gross Rent Multiplier (GRM) represent?