Real Estate Investing Investment Property Valuation 5 β Questions and Answers
Question 1: Which valuation approach would an appraiser primarily use for a brand-new single-tenant warehouse with no comparable sales?
- Cost approach (Correct answer)
- Income approach
- Sales comparison approach
- Gross rent multiplier approach
Correct answer: Cost approach
For new or special-purpose properties with few comps, the cost approach (land + construction cost β depreciation) is most reliable.
Question 2: What does a price-to-rent ratio of 20 indicate about a market?
- Buying is expensive relative to renting (Correct answer)
- Renting is more expensive than buying
- The market cap rate is 20%
- Properties are undervalued
Correct answer: Buying is expensive relative to renting
A price-to-rent ratio of 20 means property prices are 20 times annual rent, suggesting buying is costly and renting may be more economical.
Question 3: A triplex is valued at $450,000 with a GRM of 12. What is the annual gross rent?
- $37,500 (Correct answer)
- $54,000
- $45,000
- $30,000
Correct answer: $37,500
Annual Gross Rent = Property Value Γ· GRM = $450,000 Γ· 12 = $37,500.
Question 4: How does leverage typically affect the cash-on-cash return compared to the overall cap rate?
- Leverage increases cash-on-cash return when the cap rate exceeds the mortgage constant (Correct answer)
- Leverage always decreases cash-on-cash return
- Leverage has no effect on cash-on-cash return
- Leverage only improves returns when vacancy is zero
Correct answer: Leverage increases cash-on-cash return when the cap rate exceeds the mortgage constant
Positive leverage occurs when the cap rate exceeds the mortgage constant, meaning debt amplifies equity returns above what an all-cash purchase would yield.
Question 5: In the income approach, what adjustment converts potential gross income to effective gross income?
- Subtracting vacancy and credit loss (Correct answer)
- Adding capital expenditures
- Adding depreciation
- Subtracting debt service
Correct answer: Subtracting vacancy and credit loss
Effective gross income = potential gross income β vacancy allowance β credit/collection losses, reflecting realistic collectable income.
Question 6: Which term describes the practice of buying a property below market value because the seller needs to sell quickly?
- Distressed acquisition (Correct answer)
- Opportunistic investment
- Value-add investing
- Wholesale flipping
Correct answer: Distressed acquisition
A distressed acquisition involves purchasing a property below its market value due to seller distress, foreclosure, or time pressure.
Question 7: A property's income stream is projected for 10 years and then sold. Which valuation method best captures the time value of those future cash flows?
- Discounted cash flow (DCF) analysis (Correct answer)
- Gross rent multiplier
- Cost approach
- Assessed value method
Correct answer: Discounted cash flow (DCF) analysis
DCF discounts each year's projected cash flow and the terminal sale price back to present value using an appropriate discount rate.
Real Estate Investing Investment Property Valuation 5
Which valuation approach would an appraiser primarily use for a brand-new single-tenant warehouse with no comparable sales?