Real Estate Investing Real Estate Valuation Methods 2 β Questions and Answers
Question 1: A duplex generates $24,000 in annual gross rents but has $6,000 in vacancies and $8,000 in operating expenses. What is the Net Operating Income (NOI)?
- $10,000 (Correct answer)
- $16,000
- $18,000
- $24,000
Correct answer: $10,000
NOI = Gross Rents ($24,000) β Vacancy ($6,000) β Operating Expenses ($8,000) = $10,000.
Question 2: Which capitalization rate scenario indicates a LOWER-risk, more desirable market for buyers?
- Cap rate of 9%
- Cap rate of 7% (Correct answer)
- Cap rate of 11%
- Cap rate of 13%
Correct answer: Cap rate of 7%
Lower cap rates reflect higher asset prices relative to income, typical of lower-risk, high-demand markets.
Question 3: An investor uses the Gross Rent Multiplier (GRM) method. A comparable property sold for $450,000 with annual gross rents of $50,000. What GRM should be applied to a subject property earning $60,000/year?
- $480,000
- $540,000 (Correct answer)
- $600,000
- $630,000
Correct answer: $540,000
GRM = $450,000 Γ· $50,000 = 9; Subject Value = 9 Γ $60,000 = $540,000.
Question 4: Under the cost approach, what term describes the loss in value due to a property's functional layout being outdated compared to current market standards?
- Physical deterioration
- Economic obsolescence
- Functional obsolescence (Correct answer)
- External obsolescence
Correct answer: Functional obsolescence
Functional obsolescence refers to value loss from outdated features, poor layout, or inadequate design relative to current buyer expectations.
Question 5: When performing a sales comparison approach, an appraiser finds a comparable sold for $300,000 but had a pool worth $15,000 that the subject property lacks. How is the adjustment made?
- Add $15,000 to the subject's value
- Subtract $15,000 from the comparable's price (Correct answer)
- Add $15,000 to the comparable's price
- Subtract $15,000 from the subject's value
Correct answer: Subtract $15,000 from the comparable's price
Adjustments are made to the comparable: since the comp has a superior feature, subtract its value from the comp's sale price to equalize with the subject.
Question 6: Which valuation approach is MOST appropriate for a single-family home in a neighborhood with many recent sales?
- Income approach
- Cost approach
- Sales comparison approach (Correct answer)
- Discounted cash flow analysis
Correct answer: Sales comparison approach
The sales comparison approach is preferred for residential properties when abundant comparable sales data is available.
Question 7: A property's NOI is $50,000 and it sells at a 5% cap rate. If market cap rates then rise to 6.25%, what happens to the implied value?
- Value increases to $1,250,000
- Value decreases to $800,000 (Correct answer)
- Value stays at $1,000,000
- Value decreases to $750,000
Correct answer: Value decreases to $800,000
Value = NOI Γ· Cap Rate; at 5% = $1,000,000, at 6.25% = $50,000 Γ· 0.0625 = $800,000.
Real Estate Investing Real Estate Valuation Methods 2
A duplex generates $24,000 in annual gross rents but has $6,000 in vacancies and $8,000 in operating expenses.
What is the Net Operating Income (NOI)?