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
Which valuation approach would an appraiser primarily use for a brand-new single-tenant warehouse with no comparable sales?
Answer: Cost approach
For new or special-purpose properties with few comps, the cost approach (land + construction cost − depreciation) is most reliable.
What does a price-to-rent ratio of 20 indicate about a market?
Answer: Buying is expensive relative to renting
A price-to-rent ratio of 20 means property prices are 20 times annual rent, suggesting buying is costly and renting may be more economical.
A triplex is valued at $450,000 with a GRM of 12. What is the annual gross rent?
Answer: $37,500
Annual Gross Rent = Property Value ÷ GRM = $450,000 ÷ 12 = $37,500.
How does leverage typically affect the cash-on-cash return compared to the overall cap rate?
Answer: Leverage increases cash-on-cash return when the cap rate exceeds the mortgage constant
Positive leverage occurs when the cap rate exceeds the mortgage constant, meaning debt amplifies equity returns above what an all-cash purchase would yield.
In the income approach, what adjustment converts potential gross income to effective gross income?
Answer: Subtracting vacancy and credit loss
Effective gross income = potential gross income − vacancy allowance − credit/collection losses, reflecting realistic collectable income.
Which term describes the practice of buying a property below market value because the seller needs to sell quickly?
Answer: Distressed acquisition
A distressed acquisition involves purchasing a property below its market value due to seller distress, foreclosure, or time pressure.
A property's income stream is projected for 10 years and then sold. Which valuation method best captures the time value of those future cash flows?
Answer: Discounted cash flow (DCF) analysis
DCF discounts each year's projected cash flow and the terminal sale price back to present value using an appropriate discount rate.