Real Estate Investing Property Valuation Techniques 2

Question 1

What does the Gross Rent Multiplier (GRM) measure?

Accepted Answer

Purchase price divided by gross annual rent

Answer

GRM = Purchase Price ÷ Gross Annual Rent, giving a quick ratio to compare similar rental properties.

Question 2

In the income approach, which formula correctly calculates property value?

Accepted Answer

Value = NOI ÷ Cap Rate

Answer

Property Value = NOI ÷ Cap Rate, so a higher cap rate results in a lower indicated value.

Question 3

A property generates $60,000 NOI and similar properties sell at a 6% cap rate. What is the estimated value?

Accepted Answer

$1,000,000

Answer

$60,000 ÷ 0.06 = $1,000,000.

Question 4

What is 'effective gross income' (EGI) in property valuation?

Accepted Answer

Potential gross income minus vacancy and credit losses

Answer

EGI = Potential Gross Income − Vacancy & Credit Losses, representing realistic collectible income.

Question 5

Which depreciation type in real estate refers to loss in value from factors outside the property boundaries?

Accepted Answer

External obsolescence

Answer

External (economic) obsolescence stems from outside forces such as neighborhood decline or highway construction nearby.

Real Estate Investing Practice Test