Quiz 8: Valuation Using the Income Approach
The first year net operating income (NOI) will be converted into estimate of current market value using the overall cap rate. Following is the formula of the ROI: Check the overall cap rate for property A. Check the overall cap rate for property B. Check the overall cap rate for property C. Check the overall cap rate for property D. Check the overall cap rate for property E. Therefore, it is confirmed that the given overall cap rates are correct. Following table shows the overall cap rates and indicated overall cap rate: The indicated overall cap rate is the average of the of the five overall cap rates. Calculate the indicated overall cap rate as follows: Therefore, the indicated overall cap rate is .
The typical expenses owners incur in maintaining and operating rental properties are termed as operating expenses. Operating expenses include the ordinary and necessary expenditures incurred during the year that do not materially add value, but keep the property operating and competitive in the market. Mortgage payments are investor costs and are independent of the building operation costs. Mortgage costs affect the investor's net cash flow. Therefore the correct answer is D
A real estate investment is a joint investment by both the investor and the lender and therefore both parties require rates of returns that satisfy each party. The investor's rate of return is on the cash invested (Cash on Cash return) and that can be greatly influenced by the terms of financing. The leveraged investment has greater risk vs an unleveraged investment which requires a higher rate of return for an investor.