RAA RAA Income Approach & Valuation Methods 1

Question 1

In the income approach, what does Gross Rent Multiplier (GRM) represent?

Accepted Answer

The ratio of property value to annual gross rent

Answer

GRM is calculated by dividing the property's sale price by its annual (or monthly) gross rent, giving a quick value estimate.

Question 2

Which term describes the annual income a property would generate if fully occupied with no vacancy or credit losses?

Accepted Answer

Potential Gross Income

Answer

Potential Gross Income (PGI) is the maximum rental income assuming 100% occupancy and full rent collection.

Question 3

When appraising a single-family rental home, what is subtracted from Potential Gross Income to arrive at Effective Gross Income?

Accepted Answer

Vacancy and collection loss allowance

Answer

Effective Gross Income equals PGI minus a vacancy and collection loss allowance, reflecting realistic income.

Question 4

The capitalization rate (cap rate) in the income approach is best defined as:

Accepted Answer

Net Operating Income divided by property value

Answer

Cap rate = NOI ÷ Value, and it reflects the relationship between a property's income and its market value.

Question 5

In residential appraisal, when using the income approach, which operating expenses are typically excluded from the NOI calculation?

Accepted Answer

Mortgage payments (debt service)

Answer

Debt service (mortgage payments) is a financing cost, not an operating expense, and is excluded from the NOI calculation.

(RAA) Certified Residential Accredited Appraiser Practice Test