Real Estate Investing Investment Property Valuation 5

Question 1

Which valuation approach would an appraiser primarily use for a brand-new single-tenant warehouse with no comparable sales?

Accepted Answer

Cost approach

Answer

For new or special-purpose properties with few comps, the cost approach (land + construction cost − depreciation) is most reliable.

Question 2

What does a price-to-rent ratio of 20 indicate about a market?

Accepted Answer

Buying is expensive relative to renting

Answer

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?

Accepted Answer

$37,500

Answer

Annual Gross Rent = Property Value ÷ GRM = $450,000 ÷ 12 = $37,500.

Question 4

How does leverage typically affect the cash-on-cash return compared to the overall cap rate?

Accepted Answer

Leverage increases cash-on-cash return when the cap rate exceeds the mortgage constant

Answer

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?

Accepted Answer

Subtracting vacancy and credit loss

Answer

Effective gross income = potential gross income − vacancy allowance − credit/collection losses, reflecting realistic collectable income.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Investment Property Valuation 5