Real Estate Investing Real Estate Investing Property Valuation Techniques Questions and Answers 2 — Questions and Answers
Question 1: A residential property generates $2,400 per month in rental income. Using a capitalization rate of 8%, what is the estimated property value using the income approach?
- $360,000 (Correct answer)
- $300,000
- $288,000
- $400,000
Correct answer: $360,000
Annual income of $28,800 divided by a cap rate of 0.08 equals $360,000.
Question 2: Which appraisal method is most appropriate for valuing a newly constructed single-family home in a subdivision with many recent sales?
- Sales comparison approach (Correct answer)
- Income capitalization approach
- Cost approach
- Gross rent multiplier method
Correct answer: Sales comparison approach
The sales comparison approach is ideal when there are abundant comparable recent sales of similar properties.
Question 3: What does the gross rent multiplier (GRM) represent in property valuation?
- The ratio of property price to gross annual rental income (Correct answer)
- The ratio of net operating income to property price
- The ratio of operating expenses to gross income
- The ratio of debt service to net income
Correct answer: The ratio of property price to gross annual rental income
GRM is calculated by dividing the property price by its gross annual rental income.
Question 4: In the cost approach to valuation, which type of depreciation accounts for losses in value due to factors outside the property boundaries?
- External obsolescence (Correct answer)
- Functional obsolescence
- Physical deterioration
- Curable depreciation
Correct answer: External obsolescence
External obsolescence refers to value loss caused by factors external to the property such as neighborhood decline or environmental hazards.
Question 5: An investor is analyzing two comparable properties but one has a swimming pool valued at $25,000 that the subject property lacks. How should this be handled in the sales comparison approach?
- Subtract $25,000 from the comparable's sale price (Correct answer)
- Add $25,000 to the comparable's sale price
- Add $25,000 to the subject property's value
- Ignore the difference as immaterial
Correct answer: Subtract $25,000 from the comparable's sale price
When a comparable has a feature the subject lacks, you subtract that feature's value from the comparable's price to make them equivalent.
Question 6: Which factor would most likely cause functional obsolescence in a commercial property?
- An outdated floor plan that cannot accommodate modern office layouts (Correct answer)
- Cracking in the foundation due to settling
- A new highway ramp creating excessive noise nearby
- Normal wear and tear on the roof over 20 years
Correct answer: An outdated floor plan that cannot accommodate modern office layouts
Functional obsolescence results from design deficiencies or outdated features within the property itself that reduce its utility.
Real Estate Investing Real Estate Investing Property Valuation Techniques Questions and Answers 2
A residential property generates $2,400 per month in rental income.
Using a capitalization rate of 8%, what is the estimated property value using the income approach?