Real Estate Investing Property Valuation Techniques 2 — Questions and Answers
Question 1: What does the Gross Rent Multiplier (GRM) measure?
- Annual NOI divided by purchase price
- Purchase price divided by gross annual rent (Correct answer)
- Monthly rent multiplied by 12
- Cap rate divided by annual rent
Correct answer: Purchase price divided by gross annual rent
GRM = Purchase Price ÷ Gross Annual Rent, giving a quick ratio to compare similar rental properties.
Question 2: In the income approach, which formula correctly calculates property value?
- Value = NOI × Cap Rate
- Value = NOI ÷ Cap Rate (Correct answer)
- Value = Cap Rate ÷ NOI
- Value = NOI + Cap Rate
Correct answer: Value = NOI ÷ Cap Rate
Property Value = NOI ÷ Cap Rate, so a higher cap rate results in a lower indicated value.
Question 3: A property generates $60,000 NOI and similar properties sell at a 6% cap rate. What is the estimated value?
- $360,000
- $600,000
- $1,000,000 (Correct answer)
- $3,600,000
Correct answer: $1,000,000
$60,000 ÷ 0.06 = $1,000,000.
Question 4: What is 'effective gross income' (EGI) in property valuation?
- Potential gross income minus vacancy and credit losses (Correct answer)
- Net operating income before debt service
- Total rent plus all ancillary income
- Cap rate multiplied by assessed value
Correct answer: Potential gross income minus vacancy and credit losses
EGI = Potential Gross Income − Vacancy & Credit Losses, representing realistic collectible income.
Question 5: Which depreciation type in real estate refers to loss in value from factors outside the property boundaries?
- Physical deterioration
- Functional obsolescence
- External obsolescence (Correct answer)
- Accrued depreciation
Correct answer: External obsolescence
External (economic) obsolescence stems from outside forces such as neighborhood decline or highway construction nearby.
Question 6: When using the sales comparison approach, what adjustment is made if a comparable sold 12 months ago in a rising market?
- A negative time adjustment to the comparable
- A positive time adjustment to the comparable (Correct answer)
- No adjustment is needed for time
- A downward adjustment to the subject
Correct answer: A positive time adjustment to the comparable
In a rising market, older comps are adjusted upward to reflect appreciation since the sale date.
Question 7: Which method is most commonly used to value special-purpose properties with no comparable sales?
- Sales comparison approach
- Gross rent multiplier method
- Cost approach (Correct answer)
- Discounted cash flow
Correct answer: Cost approach
The cost approach (replacement/reproduction cost minus depreciation plus land value) is preferred for unique properties lacking market comparables.
Real Estate Investing Property Valuation Techniques 2
What does the Gross Rent Multiplier (GRM) measure?