Real Estate Valuation Methods 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 Real Estate Valuation Methods flashcards as text
A duplex generates $24,000 in annual gross rents but has $6,000 in vacancies and $8,000 in operating expenses. What is the Net Operating Income (NOI)?
Answer: $10,000
NOI = Gross Rents ($24,000) − Vacancy ($6,000) − Operating Expenses ($8,000) = $10,000.
Which capitalization rate scenario indicates a LOWER-risk, more desirable market for buyers?
Answer: Cap rate of 7%
Lower cap rates reflect higher asset prices relative to income, typical of lower-risk, high-demand markets.
An investor uses the Gross Rent Multiplier (GRM) method. A comparable property sold for $450,000 with annual gross rents of $50,000. What GRM should be applied to a subject property earning $60,000/year?
Answer: $540,000
GRM = $450,000 ÷ $50,000 = 9; Subject Value = 9 × $60,000 = $540,000.
Under the cost approach, what term describes the loss in value due to a property's functional layout being outdated compared to current market standards?
Answer: Functional obsolescence
Functional obsolescence refers to value loss from outdated features, poor layout, or inadequate design relative to current buyer expectations.
When performing a sales comparison approach, an appraiser finds a comparable sold for $300,000 but had a pool worth $15,000 that the subject property lacks. How is the adjustment made?
Answer: Subtract $15,000 from the comparable's price
Adjustments are made to the comparable: since the comp has a superior feature, subtract its value from the comp's sale price to equalize with the subject.
Which valuation approach is MOST appropriate for a single-family home in a neighborhood with many recent sales?
Answer: Sales comparison approach
The sales comparison approach is preferred for residential properties when abundant comparable sales data is available.
A property's NOI is $50,000 and it sells at a 5% cap rate. If market cap rates then rise to 6.25%, what happens to the implied value?
Answer: Value decreases to $800,000
Value = NOI ÷ Cap Rate; at 5% = $1,000,000, at 6.25% = $50,000 ÷ 0.0625 = $800,000.
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