Class 17

Question 1

Capitalization is the process by which annual net operating income is used to…

Answer 1

estimate value

Question 2

If a property’s annual net income is $24,000 and it is valued at $300,000 what is its capitalization rate/how do we find it?

Answer 2

Annual net income / value = CAP rate
$300,000 / $24,000 = CAP Rate
CAP Rate = 0.08, or 8%

Question 3

What is a competitive market analysis

Answer 3

A CMA is a market study usually prepared by licensed agents which is used to help buyers and sellers determine purchase and list prices of property

Question 4

A ___________ is used to find the amount of the adjustment for a particular attribute

Answer 4

paired sales analysis

Question 5

The process of changing income into value

Answer 5

Capitalization

Question 6

A rate that returns capital

Answer 6

Recapture

Question 7

Gross income minus vacancy and expenses

Answer 7

Net income

Question 8

Gross income minus vacancy

Answer 8

Effective gross income

Question 9

Another name for a return rate

Answer 9

CAP Rate

Question 10

approach used to find the value of commercial properties

Answer 10

income approach

Question 11

Acronym for a rent multiplier

Answer 11

GRM

Question 12

A fixed expense

Answer 12

Taxes

Question 13

To find value, you _____ the net income by the cap rate

Answer 13

divide

Question 14

In appraising, the word capitalization means to convert an income into a ______

Answer 14

value

Question 15

there are two methods used to convert an income into a value with the Income Approach:
–Direct Capitalization
–Yield Capitalization
Explain the difference

Answer 15

Direct capitalization - value based on 1 year income

Yield capitalization - value based on income over a number of years

Question 16

What is potential gross income

Answer 16

income earned if a property were 100% occupied

also other sources such as laundry and vending machines

Question 17

Higher/Lower:

The ________ the CAP rate, the _____ the value

Answer 17

higher

lower

Question 18

Contract rent is the rent that is obtained through….

Answer 18

present leases

Question 19

Reserve accounts, which are fees set aside to replace items that typically wear out, is also called ________ accounts

Answer 19

sinking funds accounts

Question 20

The income left after all expenses have been subtracted is called ____________

Answer 20

net operating income

Question 21

A Cap rate is used to find the….

Answer 21

value of an income producting property

Question 22

A ______ is built into a cap rate to recover capital invested

Answer 22

Recapture rate

Question 23

To find value using the income approach, an appraiser divides the net income by a _______

Answer 23

cap rate

Question 24

A gross rent multiplier may be used to find the value of….

Answer 24

small residential property

Question 25

A gross income multiplier is used to find the value of....

Answer 25

small commercial income property

Question 26

A capital gain in the profit made from the.....

Answer 26

sale of real estate

Question 27

What is the exclusion for capital gain?

Answer 27

A homeowner who files single taxes does not have to pay any capital gain taxes on the first $250,000 of profit if they have lived in the property for 2 of 5 years. A homeowner who files joint taxes does not have to pay any capital gain taxes on the first $500,000 of profit if they have lived there for 2 of 5 years

Question 28

A homeowner may reduce taxable income by deducting _______ and ________

Answer 28

interest taxes **A homeowner may NOT deduct expenses such as plumbing repairs

Question 29

CAP Rate = NOI / Sale Price

Question 30

If the income of property remains the same, a decrease in a cap rate would _______ the property's value, while an increase in the rate would ________ the property value

Answer 30

increase | decrease

Question 31

CAP Rate equals...

Answer 31

NOI / sale price

Question 32

The Gross Rent Multiplier is used to estimate the value of what kind of property and what kind of income?

Answer 32

small residential properties of four units or less | rental income only

Question 33

The Gross income multiplier (GIM) is used for what kind of properties?

Answer 33

Commercial properties (because they may produce income other than rent)

Question 34

Formulas for GRM and GIM

Answer 34

GRM * Monthly rent = value * expenses are not considered when doing the GRM GIM * yearly INCOME = value **yearly income could be rent plus any other income

Question 35

How do you find the multiplier for GRM or GIM

Answer 35

Use comparable properties Sale price / monthyl rent = multiplier

Question 36

A recapture rate is built into capitalization rate to compensate the owner for:

Answer 36

capital recovery

Question 37

How do you find the effective gross income of a property

Answer 37

EGI = gross income - vacancy rate or EGI = net income + expenses

Question 38

An appraiser who is gathering information regarding operating expenses would not be concerned with....

Answer 38

debt service

Question 39

As a general rule, when the net income of a property remains constant, an increase in a cap rate would:

Answer 39

decrease the value of the property

Question 40

When an appraiser subtracts the expenses from the effective gross income, the appraiser is seeking the....

Answer 40

net income