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 property's potential gross income is $120,000. Vacancy and collection loss is 5% and operating expenses are $40,000. What is the NOI?
Answer: $74,000
EGI = $120,000 × 0.95 = $114,000; NOI = $114,000 − $40,000 = $74,000.
What is the band-of-investment method used to estimate in property valuation?
Answer: The overall capitalization rate
The band-of-investment method derives a cap rate by weighting mortgage and equity return requirements by their share of total investment.
Which situation would most likely cause external obsolescence in a rental property's valuation?
Answer: A new highway built adjacent to the property
External obsolescence is caused by factors outside the property, such as nearby highways, industrial development, or economic downturns.
An investor values a property using a 7% cap rate but the seller used 5.5%. Why might they disagree?
Answer: Different risk perceptions or required returns
Cap rates reflect investor risk tolerance and return expectations; a higher cap rate signals the buyer requires more return or perceives more risk.
In the discounted cash flow (DCF) method, what is the terminal value?
Answer: The estimated resale price at the end of the holding period
Terminal value (reversion) is the projected sale price at the end of the analysis period, often estimated by capitalizing the final year's NOI.
Which of the following is NOT included in operating expenses when calculating NOI?
Answer: Mortgage principal payments
Mortgage principal (and interest) is a financing cost, not an operating expense; NOI is calculated before debt service.
A commercial property sells for $2 million with an NOI of $160,000. A comparable sold last year at a 7.5% cap rate. Is this property over- or underpriced?
Answer: Underpriced — implied cap rate of 8% exceeds market at 7.5%
Implied cap rate = $160,000 ÷ $2,000,000 = 8%; since 8% > market rate of 7.5%, the property offers more income per dollar, meaning it may be underpriced relative to market.