Investment Property Valuation Flashcards
7 cards from real Real Estate Investing practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Property Valuation flashcards as text
A duplex generates $2,400/month in gross rent. Using a GRM of 10, what is the estimated property value?
Answer: $240,000
GRM = Price ÷ Annual Rent, so Value = GRM × Annual Rent = 10 × ($2,400 × 12) = $288,000.
Which valuation approach is most appropriate for an income-producing apartment complex with no recent comparable sales?
Answer: Income approach
The income approach values property based on its ability to generate rental income, ideal when comps are scarce.
What does a rising cap rate in a given market typically signal to investors?
Answer: Declining property values relative to income
A rising cap rate means prices are falling relative to NOI, indicating either declining values or increased perceived risk.
An investor uses the cost approach to value a 20-year-old rental property. Which adjustment must be made to replacement cost?
Answer: Depreciation
The cost approach subtracts accumulated depreciation (physical, functional, and external) from replacement cost new.
A property has an NOI of $50,000 and sells for $625,000. What is the cap rate?
Answer: 8%
Cap rate = NOI ÷ Value = $50,000 ÷ $625,000 = 0.08 = 8%.
Which factor would DECREASE a rental property's appraised value when using the income approach?
Answer: Higher vacancy rate
A higher vacancy rate reduces effective gross income, which lowers NOI and therefore the income approach value.
What is the primary limitation of using the gross rent multiplier (GRM) for property valuation?
Answer: It ignores operating expenses
GRM uses gross rent without accounting for vacancies, taxes, insurance, or maintenance, making it a rough estimate only.