Real Estate Appraisal - Chapter 11: Income Capitalization Approach

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Real Estate Appraisal - Chapter 11: Income Capitalization Approach
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Real Estate Appraisal - Chapter 11: Income Capitalization Approach
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  1. The main principle behind the income approach is:

    a. anticipation

    b. production

    c. multiplication

    d. supplication
    (a) The principle of anticipation is the main principle behind the income approach, since the amount a buyer will typically pay for a property is directly proportional to the future income benefits the buyer expects to derive from tat property. Page 326
  2. Potential gross income includes income from:

    a. rent

    b. parking fees

    c. laundry and vending machines

    d. all of the above
    (d) The most obvious income a property produces is the rent paid by tenants of a property. Sources of additional income include laundry and vending machines, parking fees, interest earned on security deposits, and possibly, income resulting from government programs. Potential gross income encompasses all of these possible sources. Page 327
  3. The purpose of a rental survey is to:

    a. find out if tenants think the rent is reasonable

    b. identify the amount of income the subject property can be expected to generate

    c. determine how many comparable properties are currently rented

    d. determine vacancy losses
    (b) The purpose of performing a rental survey is to identify, with reasonable certainty, the amount of income the subject property can be expected to generate. Page 329
  4. Over the last year, a 10-unit apartment complex had 2 units that were each vacant for 1 1/2 months. What was the vacancy loss?

    a. 2.5%

    b. 5%

    c. 15%

    d. 20%
    (a) 10 units multiplied by 12 months = 120 months of rent due.  2 units times 1 1/2 months vacant = 3 months of rent lost due to vacancy. 3 months divided by 120 months = .025 or 2.5%. Page 330
  5. Which of the following is an example of a fixed expense?

    a. marketing fees

    b. cleaning expenses

    c. property taxes

    d. none of the above
    (c) Fixed expenses are incurred by the owner whether or not the property is occupied. Property taxes, insurance premiums, and licenses typically fall into this category. Page 331
  6. An accountant has provided the appraiser with the subject property's operating statement. It included the following list of expenses:

    Utilities: $2,150
    Repairs: $1,075
    Management: $3,000
    Property taxes: $4,000
    Mortgage - principal and interest: $12,000

    From the appraiser's perspective, the operating expenses total:

    a. $3,225

    b. $7,225

    c. $10,225

    d. $22,225
    (c) Accountants record expenses in a different manner from that of appraisers. Items such as financing expenses, income taxes, book depreciation charges, and capital improvements are all expenses that property owners incur. When compiling an appraisal operating statement, appraisers omit these expenses since they vary from owner to owner and are not based on the property itself. Of the expenses listed, the mortgage is the only expenses that an appraiser would not count. $2,150 + $1,075 + $3,000 + $4,000 = $10,225. Page 333
  7. If a property rents for $1025/month and the gross rent multiplier is 240, what is the value of the property?

    a. $246,000

    b. $258,300

    c. $634,050

    d. $2,952,000
    (a) $1,025 multiplied by 240 = $246,000. Page 337
  8. If a property's net operating income is $92,250 and the estimated cap rate is 9%, what is the value of the property?

    a. $100,553

    b. $1,025,000

    c. $1,206,630

    d. None of the above
    (b) $92,250 divided by .09 (9%) = $1,025,000. Page 338
  9. Safe investments would have a: 

    a. low capitalization rate and low value

    b. low capitalization rate and high value

    c. high capitalization rate and high value

    d. high capitalization rate and low value
    (b) If an investment is safe, the odds are it will have a relatively low return on investment. However, a property with a low risk is generally worth more than one with a high risk where investment loss is more likely. Low risk = Low capitalization rate = High value. Page 339
  10. A property has an effective gross income of $100,000 ad operating expenses totaling $15,00. Which of the following statements is true?

    a. The operating expense ratio is 0.15. The net operating income cannot be determined.

    b. The operating expense ratio is .18. The net operating income cannot be determined, but the net operating income ratio must be .82

    c. The operating expense ratio is .15. The net operating income is $85,000 and the net operating income ratio is .85

    d. none of the above
    (c) The operating expense ratio is calculated by dividing the property's operating expenses by its effective gross income. $15,000 divided by $100,000 = .15. To calculate net operating income, an appraiser deducts operating expenses from effective gross income. $100,000 minus $15,000 = $85,000. A net operating income ratio is the ratio between the net operating income of a property and its effective gross income. $85,000 divided by $100,000 = 0.85. Because these two ratios are complementary, adding them together will result in 1.0 or 100%.

    .15 + .85 = 1.0

    Pages 340 - 341
  11. In the band of investment method, the mortgage constant is:

    a. a market derived percentage of the debt capital

    b. the pre-tax cash flow divided by the amount of debt investment

    c. an amount that is deducted from a property's income to account for the mortgage payments that a typical owner would make

    d. the ratio of the loan amount to the annual sum of the individual loan payments
    (d) The mortgage constant is the ratio of the loan amount (principal) to the annual sum of the individual loan payments. Page 341
  12. The building residual technique is used when:

    a. the building value is known

    b. the land value is known

    c. comparable land sales data is not available

    d. a building has burned down and the appraiser must determine the value of the remaining structural elements
    (b) The building residual technique is used when the land value is known (or easily estimated). Page 344
  13. All of the following are steps in the yield capitalization process, except:

    a. projecting the holding period of the investment

    b. estimating and forecasting all the future cash flows associated with the investment

    c. identifying an appropriate discount rate

    d. determining the gross income multiplier
    (d) When performing yield capitalization, the appraiser completes certain steps: 1. Project the holding period of the investment. 2. Estimate and forecast all the future cash flows associated with the investment. 3. Identify an appropriate discount rate. 4. Convert the future benefits into a present value estimate for the property. Page 347
  14. Bob, a property owner, needs to set aside money for replacement reserves. He plans to invest money regularly in an account that gives 5% interest, and he wants to accumulate $16,000 to replace the roof of the apartment complex 3 years from now. Which function of one dollar would he use to determine how much he as to invest each year?

    a. Column 2, Future value of $1 per Period

    b. Column 3, Sinking Fund Factor

    c. Column 4, Present value of $1

    d. Column 6, Installment to Amortize $1
    (b) Column 3 will tell the investor how much must be invested each year to accumulate a specific amount at the end of the stated period. Page 332 & 349
  15. Which function of one dollar is most commonly used by appraisers?

    a. Column 1, Future value of $1

    Column 2, Future value of $1 per Period

    c. Column, Sinking Fund Factor

    d. Column 5, Present value of an Annuity of $1 per Period
    (d) Column 5 is the one real estate appraisers use most frequently, and it is used to estimate the present value of an annuity. Page 351

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