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 cap rate is calculated by dividing the net operating income (NOI) by the property's current market value or purchase price.

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

NOI is calculated by subtracting vacancy/collection losses and operating expenses, excluding debt service, from potential gross income.

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

Direct capitalization converts a stabilized single year's NOI into a value estimate by dividing NOI by the overall capitalization rate.

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

Mortgage principal (debt service) is a financing cost, not an operating expense, so it is excluded from the NOI calculation.

Question 5

What is a Gross Rent Multiplier (GRM)?

Accepted Answer

The ratio of sale price to gross rental income

Answer

GRM is a simple valuation metric calculated by dividing a property's sale price by its gross annual or monthly rental income.

SAEE Test Practice Test