SAEE Income Approach and Capitalization

Question 1

Which income approach method estimates value by dividing a single year's net operating income by an overall capitalization rate?

Accepted Answer

Direct capitalization

Answer

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?

Accepted Answer

Potential gross income minus vacancy and operating expenses

Answer

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?

Accepted Answer

$1,000,000

Answer

$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?

Accepted Answer

Mortgage debt service

Answer

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:

Accepted Answer

Total required return on the investment including risk

Answer

The discount rate in yield capitalization represents the investor's required total return, accounting for risk and the time value of money.

SAEE Test Practice Test