Real Estate Investing FREE Real Estate Investing Investment Property Valuation Questions and Answers 2 β Questions and Answers
Question 1: A rental property generates $48,000 in annual gross rent with a 10% vacancy rate and $18,000 in operating expenses. What is the Net Operating Income (NOI)?
- $25,200 (Correct answer)
- $30,000
- $25,800
- $24,200
Correct answer: $25,200
NOI = Gross Rent Γ (1 - Vacancy Rate) - Operating Expenses = $48,000 Γ 0.90 - $18,000 = $25,200.
Question 2: Which valuation approach estimates property value by comparing recent sales of similar properties with adjustments for differences?
- Sales comparison approach (Correct answer)
- Income capitalization approach
- Cost approach
- Gross rent multiplier method
Correct answer: Sales comparison approach
The sales comparison approach values property by analyzing recent comparable sales and adjusting for differences in features, location, and condition.
Question 3: An investor purchases a property for $300,000 with a $60,000 down payment. If the property appreciates to $330,000, what is the return on equity from appreciation alone?
- 50% (Correct answer)
- 10%
- 30%
- 20%
Correct answer: 50%
The $30,000 appreciation divided by the $60,000 equity investment equals a 50% return on equity.
Question 4: What does a debt service coverage ratio (DSCR) of 0.85 indicate about an investment property?
- The property's NOI is insufficient to cover its mortgage payments (Correct answer)
- The property generates 85% more income than needed for debt payments
- The property has an 85% occupancy rate
- The property's value has decreased by 15%
Correct answer: The property's NOI is insufficient to cover its mortgage payments
A DSCR below 1.0 means the property's net operating income does not fully cover its annual debt obligations.
Question 5: In the cost approach to property valuation, which type of depreciation is caused by factors external to the property such as a new highway built nearby?
- Economic obsolescence (Correct answer)
- Functional obsolescence
- Physical deterioration
- Deferred maintenance
Correct answer: Economic obsolescence
Economic (or external) obsolescence results from factors outside the property's boundaries that negatively affect its value.
Question 6: A property has a purchase price of $500,000, annual NOI of $40,000, and annual mortgage payments of $30,000. What is the cash-on-cash return if the investor put $125,000 down?
- 8% (Correct answer)
- 32%
- 10%
- 24%
Correct answer: 8%
Cash-on-cash return = (NOI - Debt Service) / Cash Invested = ($40,000 - $30,000) / $125,000 = 8%.
Real Estate Investing FREE Real Estate Investing Investment Property Valuation Questions and Answers 2
A rental property generates $48,000 in annual gross rent with a 10% vacancy rate and $18,000 in operating expenses.
What is the Net Operating Income (NOI)?