SAEE Income Approach and Capitalization 1 — Questions and Answers
Question 1: Which income approach method estimates value by dividing a single year's net operating income by an overall capitalization rate?
- Direct capitalization (Correct answer)
- Yield capitalization
- Discounted cash flow
- Gross rent multiplier
Correct answer: Direct capitalization
Direct capitalization converts a single year's stabilized NOI into a value indication by dividing it by an overall cap rate.
Question 2: What is net operating income (NOI) in real property appraisal?
- Potential gross income minus vacancy and operating expenses (Correct answer)
- Effective gross income minus vacancy allowance only
- Total rental income before any deductions
- Effective gross income minus debt service
Correct answer: Potential gross income minus vacancy and operating expenses
NOI equals potential gross income less vacancy and collection loss and all operating expenses, but before debt service.
Question 3: A property generates $80,000 NOI and comparable sales indicate an overall cap rate of 8%. What is the indicated value?
- $1,000,000 (Correct answer)
- $800,000
- $640,000
- $1,200,000
Correct answer: $1,000,000
$80,000 ÷ 0.08 = $1,000,000 using the direct capitalization formula V = NOI / R.
Question 4: Which of the following is NOT typically included as an operating expense in an income approach analysis?
- Mortgage debt service (Correct answer)
- Property taxes
- Insurance premiums
- Management fees
Correct answer: Mortgage debt service
Mortgage debt service is a financing cost and is excluded from operating expenses when calculating NOI.
Question 5: In yield capitalization, the discount rate used reflects the:
- Total required return on the investment including risk (Correct answer)
- Current mortgage interest rate only
- Local property tax rate
- Depreciation rate of improvements
Correct answer: Total required return on the investment including risk
The discount rate in yield capitalization represents the investor's required total return, accounting for risk and the time value of money.
Question 6: The gross rent multiplier (GRM) is calculated by dividing:
- Sale price by gross annual rental income (Correct answer)
- NOI by effective gross income
- Sale price by net operating income
- Effective gross income by operating expenses
Correct answer: Sale price by gross annual rental income
GRM = Sale Price ÷ Gross Annual Rental Income, providing a quick value indicator for residential income properties.
SAEE Income Approach and Capitalization 1
Which income approach method estimates value by dividing a single year's net operating income by an overall capitalization rate?