Real Estate Investing Investment Property Valuation 4

Question 1

A property's potential gross income is $120,000. Vacancy and collection loss is 5% and operating expenses are $40,000. What is the NOI?

Accepted Answer

$74,000

Answer

EGI = $120,000 × 0.95 = $114,000; NOI = $114,000 − $40,000 = $74,000.

Question 2

What is the band-of-investment method used to estimate in property valuation?

Accepted Answer

The overall capitalization rate

Answer

The band-of-investment method derives a cap rate by weighting mortgage and equity return requirements by their share of total investment.

Question 3

Which situation would most likely cause external obsolescence in a rental property's valuation?

Accepted Answer

A new highway built adjacent to the property

Answer

External obsolescence is caused by factors outside the property, such as nearby highways, industrial development, or economic downturns.

Question 4

An investor values a property using a 7% cap rate but the seller used 5.5%. Why might they disagree?

Accepted Answer

Different risk perceptions or required returns

Answer

Cap rates reflect investor risk tolerance and return expectations; a higher cap rate signals the buyer requires more return or perceives more risk.

Question 5

In the discounted cash flow (DCF) method, what is the terminal value?

Accepted Answer

The estimated resale price at the end of the holding period

Answer

Terminal value (reversion) is the projected sale price at the end of the analysis period, often estimated by capitalizing the final year's NOI.

Real Estate Investing Practice Test