Real Estate Investing Real Estate Investing Real Estate Valuation Methods Questions and Answers 2 β Questions and Answers
Question 1: A property generates $120,000 in net operating income and the market capitalization rate is 8%. What is the estimated value using the income approach?
- $1,500,000 (Correct answer)
- $960,000
- $1,200,000
- $1,000,000
Correct answer: $1,500,000
Dividing $120,000 NOI by the 0.08 cap rate yields a property value of $1,500,000.
Question 2: Which valuation method is most appropriate for a unique, owner-occupied industrial facility with no recent comparable sales?
- Cost approach (Correct answer)
- Sales comparison approach
- Income approach
- Gross rent multiplier
Correct answer: Cost approach
The cost approach is best suited for unique properties where comparable sales and income data are limited.
Question 3: In the sales comparison approach, if a comparable property sold for $350,000 but lacks a garage that the subject property has, and garages in the area add $25,000 in value, what adjusted sale price should be used?
- $375,000 (Correct answer)
- $325,000
- $350,000
- $300,000
Correct answer: $375,000
You add $25,000 to the comparable's price because it lacks a feature the subject property has.
Question 4: What does the gross rent multiplier (GRM) represent?
- The ratio of a property's sale price to its gross annual rental income (Correct answer)
- The ratio of net operating income to property value
- The annual return on a real estate investment
- The percentage of rental income consumed by operating expenses
Correct answer: The ratio of a property's sale price to its gross annual rental income
GRM is calculated by dividing the sale price by the gross annual rental income.
Question 5: When using the cost approach, which type of depreciation accounts for losses in value due to outdated floor plans or design features?
- Functional obsolescence (Correct answer)
- Physical deterioration
- External obsolescence
- Economic depreciation
Correct answer: Functional obsolescence
Functional obsolescence refers to value loss caused by outdated design, layout, or features within the property.
Question 6: An appraiser identifies three comparable properties that sold for $280,000, $295,000, and $310,000 after adjustments. Which step best describes how the appraiser reconciles these values?
- Weighting the comparables based on similarity to the subject and reliability of data (Correct answer)
- Averaging all three sale prices equally
- Selecting the highest adjusted price
- Discarding the lowest and highest and using the middle value
Correct answer: Weighting the comparables based on similarity to the subject and reliability of data
Reconciliation involves assigning greater weight to comparables most similar to the subject rather than simply averaging.
Real Estate Investing Real Estate Investing Real Estate Valuation Methods Questions and Answers 2
A property generates $120,000 in net operating income and the market capitalization rate is 8%.
What is the estimated value using the income approach?