Real Estate Investing Property Valuation Techniques 3

Question 1

In a discounted cash flow (DCF) analysis, what does the terminal value represent?

Accepted Answer

The estimated resale price at the end of the holding period

Answer

Terminal (reversion) value is the projected sale price at the end of the investment horizon, typically estimated by capitalizing the final year's NOI.

Question 2

What is a 'going-in cap rate'?

Accepted Answer

The cap rate applied to year-one NOI at the time of purchase

Answer

The going-in cap rate equals Year-1 NOI divided by the acquisition price, benchmarking initial yield.

Question 3

Which value concept reflects what a property would sell for under normal market conditions between knowledgeable, willing parties?

Accepted Answer

Market value

Answer

Market value assumes an arm's-length transaction between informed, willing buyers and sellers with no undue pressure.

Question 4

How does a higher vacancy rate affect a property's indicated value under the income approach?

Accepted Answer

It decreases value by reducing effective gross income

Answer

Higher vacancy reduces effective gross income, which lowers NOI and therefore lowers the capitalized value.

Question 5

What is the purpose of a 'reconciliation' step in the appraisal process?

Accepted Answer

To weigh and justify the relative reliability of each approach's value indication

Answer

Reconciliation involves weighing each approach's credibility given data quality and property type to arrive at a final value opinion.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Property Valuation Techniques 3