Real Estate Investing Real Estate Investing Property Valuation Techniques Questions and Answers 3

Question 1

What is the primary difference between the direct capitalization method and the discounted cash flow (DCF) method in income-based valuation?

Accepted Answer

Direct capitalization uses a single year's income while DCF projects income over multiple years

Answer

Direct capitalization accounts for future rent increases while DCF does not

Answer

DCF uses a single cap rate while direct capitalization uses a discount rate

Answer

Both methods produce identical results under all market conditions

Question 2

A property sold for $500,000 and has an effective gross income of $62,500. What is the effective gross income multiplier (EGIM)?

Accepted Answer

8.0

Answer

7.5

Answer

12.5

Answer

6.25

Question 3

When using the cost approach, which component represents what it would cost to build an exact replica of the existing structure using the same materials and methods?

Accepted Answer

Reproduction cost

Answer

Replacement cost

Answer

Assessed value

Answer

Insurable value

Question 4

An appraiser identifies that a comparable property sold under duress in a foreclosure sale. What adjustment principle applies?

Accepted Answer

The sale should be excluded or heavily adjusted because it does not reflect fair market value

Answer

The sale price should be increased by 10% as a standard foreclosure premium

Answer

No adjustment is needed because all sales reflect market conditions

Answer

The sale should be used as-is to reflect current market trends

Question 5

In a highest and best use analysis, which of the following criteria must a proposed use meet?

Accepted Answer

Legally permissible, physically possible, financially feasible, and maximally productive

Answer

Legally permissible and financially feasible only

Answer

Physically possible and maximally productive only

Answer

Legally permissible, environmentally sustainable, and community approved

Question 6

What does a capitalization rate implicitly reflect about investor expectations for a property?

Accepted Answer

The required rate of return relative to the perceived risk of the investment

Answer

The annual rate of physical depreciation on the structure

Answer

The mortgage interest rate available for the property

Answer

The annual property tax rate assessed by the local municipality