Real Estate Investing Investment Property Valuation 3 — Questions and Answers
Question 1: A commercial property has an NOI of $80,000. Market cap rates for similar properties are 6.5%. What is the indicated value?
- $1,230,769 (Correct answer)
- $1,000,000
- $1,500,000
- $520,000
Correct answer: $1,230,769
Value = NOI ÷ Cap Rate = $80,000 ÷ 0.065 = $1,230,769.
Question 2: Which type of depreciation is caused by poor floor plan design or outdated kitchen layout in a rental property?
- Functional obsolescence (Correct answer)
- External obsolescence
- Physical deterioration
- Economic depreciation
Correct answer: Functional obsolescence
Functional obsolescence results from outdated or poor design features that reduce a property's utility or appeal.
Question 3: When comparing two otherwise identical properties, which one will have the HIGHER valuation using the income approach?
- The one with lower operating expenses (Correct answer)
- The one with higher vacancy
- The one with a higher cap rate
- The one with higher debt service
Correct answer: The one with lower operating expenses
Lower operating expenses increase NOI; a higher NOI at the same cap rate produces a higher property value.
Question 4: What is 'effective gross income' in real estate valuation?
- Potential gross income minus vacancy and credit losses (Correct answer)
- Net operating income after debt service
- Total rent collected plus utility reimbursements
- Gross rent multiplied by occupancy rate
Correct answer: Potential gross income minus vacancy and credit losses
Effective gross income adjusts potential gross income downward for vacancy, collection losses, and sometimes adds ancillary income.
Question 5: An appraiser makes a downward adjustment to a comparable sale because the comparable has a newer roof. What does this mean?
- The subject property is inferior to the comparable (Correct answer)
- The subject property is superior to the comparable
- The comparable sold below market value
- The adjustment increases the subject's value
Correct answer: The subject property is inferior to the comparable
When a comparable is superior to the subject in a feature, the appraiser adjusts the comparable's price downward to reflect what it would have sold for without that advantage.
Question 6: Which metric best measures the return on all capital invested in a property, regardless of financing?
- Overall cap rate (OAR) (Correct answer)
- Cash-on-cash return
- Debt coverage ratio
- Equity dividend rate
Correct answer: Overall cap rate (OAR)
The overall cap rate measures NOI as a percentage of total property value, ignoring how the purchase was financed.
Question 7: A mixed-use building generates income from retail and residential tenants. Which valuation approach reconciles this best?
- Income approach using blended cap rate (Correct answer)
- Sales comparison using only residential comps
- Cost approach using replacement cost only
- Assessed value from tax records
Correct answer: Income approach using blended cap rate
A blended cap rate weights the different risk profiles of retail and residential income streams for a more accurate income-approach value.
Real Estate Investing Investment Property Valuation 3
A commercial property has an NOI of $80,000.
Market cap rates for similar properties are 6.5%.
What is the indicated value?