Real Estate Investing Investment Property Valuation 2 — Questions and Answers
Question 1: A duplex generates $2,400/month in gross rent. Using a GRM of 10, what is the estimated property value?
- $240,000 (Correct answer)
- $288,000
- $120,000
- $480,000
Correct answer: $240,000
GRM = Price ÷ Annual Rent, so Value = GRM × Annual Rent = 10 × ($2,400 × 12) = $288,000.
Question 2: Which valuation approach is most appropriate for an income-producing apartment complex with no recent comparable sales?
- Income approach (Correct answer)
- Sales comparison approach
- Cost approach
- Assessed value approach
Correct answer: Income approach
The income approach values property based on its ability to generate rental income, ideal when comps are scarce.
Question 3: What does a rising cap rate in a given market typically signal to investors?
- Declining property values relative to income (Correct answer)
- Increasing property values
- Lower investment risk
- Higher demand for properties
Correct 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.
Question 4: An investor uses the cost approach to value a 20-year-old rental property. Which adjustment must be made to replacement cost?
- Depreciation (Correct answer)
- Vacancy allowance
- Debt service
- Cap rate adjustment
Correct answer: Depreciation
The cost approach subtracts accumulated depreciation (physical, functional, and external) from replacement cost new.
Question 5: A property has an NOI of $50,000 and sells for $625,000. What is the cap rate?
- 8% (Correct answer)
- 6%
- 10%
- 12.5%
Correct answer: 8%
Cap rate = NOI ÷ Value = $50,000 ÷ $625,000 = 0.08 = 8%.
Question 6: Which factor would DECREASE a rental property's appraised value when using the income approach?
- Higher vacancy rate (Correct answer)
- Lower property tax
- Longer average lease term
- Higher market rents
Correct answer: Higher vacancy rate
A higher vacancy rate reduces effective gross income, which lowers NOI and therefore the income approach value.
Question 7: What is the primary limitation of using the gross rent multiplier (GRM) for property valuation?
- It ignores operating expenses (Correct answer)
- It requires a cap rate
- It only applies to commercial properties
- It uses after-tax cash flow
Correct answer: It ignores operating expenses
GRM uses gross rent without accounting for vacancies, taxes, insurance, or maintenance, making it a rough estimate only.
Real Estate Investing Investment Property Valuation 2
A duplex generates $2,400/month in gross rent.
Using a GRM of 10, what is the estimated property value?