Real Estate Investing Investment Property Valuation 3

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?

Accepted Answer

$1,230,769

Answer

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Which type of depreciation is caused by poor floor plan design or outdated kitchen layout in a rental property?

Accepted Answer

Functional obsolescence

Answer

Functional obsolescence results from outdated or poor design features that reduce a property's utility or appeal.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?

Accepted Answer

The one with lower operating expenses

Answer

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?

Accepted Answer

Potential gross income minus vacancy and credit losses

Answer

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?

Accepted Answer

The subject property is inferior to the comparable

Answer

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.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Investment Property Valuation 3