Real Estate Investing Real Estate Valuation Methods 3

Question 1

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

Accepted Answer

The estimated resale value at the end of the holding period

Answer

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

Question 2

An office building has an NOI of $200,000. Using a 8% overall cap rate, what is the indicated value?

Accepted Answer

$2,500,000

Answer

Value = NOI ÷ Cap Rate = $200,000 ÷ 0.08 = $2,500,000.

Question 3

Which type of depreciation in the cost approach CANNOT be cured by the property owner?

Accepted Answer

External obsolescence

Answer

External (economic) obsolescence stems from forces outside the property, such as a nearby highway or declining neighborhood, and cannot be remedied by the owner.

Question 4

A property's effective gross income (EGI) is $120,000 and its operating expense ratio is 40%. What is the NOI?

Accepted Answer

$72,000

Answer

NOI = EGI × (1 − OER) = $120,000 × 0.60 = $72,000.

Question 5

Which adjustment in the sales comparison approach accounts for the fact that market conditions have improved since a comparable sale occurred six months ago?

Accepted Answer

Market conditions (time) adjustment

Answer

A market conditions adjustment (time adjustment) corrects for appreciation or depreciation that occurred between the comp's sale date and the appraisal date.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Real Estate Valuation Methods 3