SAEE SAEE Income Approach and Capitalization 1

Question 1

What does the capitalization rate (cap rate) represent in income property valuation?

Accepted Answer

The ratio of net operating income to property value

Answer

The ratio of gross income to property value

Answer

The ratio of debt service to property value

Answer

The ratio of vacancy loss to gross income

Question 2

In the income approach, what is Net Operating Income (NOI)?

Accepted Answer

Potential gross income minus vacancy and collection losses minus operating expenses

Answer

Effective gross income minus debt service

Answer

Potential gross income minus all expenses including mortgage payments

Answer

Gross income minus only fixed expenses

Question 3

What is the Direct Capitalization method?

Accepted Answer

Converting a single year's income estimate into a value indication by dividing by a cap rate

Answer

Discounting multiple years of projected income to present value

Answer

Multiplying gross rent by a gross rent multiplier

Answer

Adding net income to the property's depreciated cost

Question 4

Which of the following is typically NOT included as an operating expense in an income approach analysis?

Accepted Answer

Mortgage principal payments

Answer

Property taxes

Answer

Insurance premiums

Answer

Maintenance and repair costs

Question 5

What is a Gross Rent Multiplier (GRM)?

Accepted Answer

The ratio of sale price to gross rental income

Answer

The ratio of NOI to sale price

Answer

The ratio of effective gross income to operating expenses

Answer

The ratio of net income to equity

Question 6

In the Yield Capitalization (DCF) method, what does the discount rate represent?

Accepted Answer

The required rate of return on equity or total investment

Answer

The local bank prime lending rate

Answer

The overall capitalization rate from direct capitalization

Answer

The inflation rate plus a risk premium