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Real Estate Exam > Class 17 > Flashcards

Class 17 Flashcards

1
Q

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

A

estimate value

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2
Q

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?

A

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

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3
Q

What is a competitive market analysis

A

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

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4
Q

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

A

paired sales analysis

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5
Q

The process of changing income into value

A

Capitalization

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6
Q

A rate that returns capital

A

Recapture

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7
Q

Gross income minus vacancy and expenses

A

Net income

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8
Q

Gross income minus vacancy

A

Effective gross income

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9
Q

Another name for a return rate

A

CAP Rate

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10
Q

approach used to find the value of commercial properties

A

income approach

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11
Q

Acronym for a rent multiplier

A

GRM

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12
Q

A fixed expense

A

Taxes

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13
Q

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

A

divide

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14
Q

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

A

value

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15
Q

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

A

Direct capitalization - value based on 1 year income

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

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16
Q

What is potential gross income

A

income earned if a property were 100% occupied

also other sources such as laundry and vending machines

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17
Q

Higher/Lower:

The ________ the CAP rate, the _____ the value

A

higher

lower

18
Q

Contract rent is the rent that is obtained through….

A

present leases

19
Q

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

A

sinking funds accounts

20
Q

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

A

net operating income

21
Q

A Cap rate is used to find the….

A

value of an income producting property

22
Q

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

A

Recapture rate

23
Q

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

A

cap rate

24
Q

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

A

small residential property

25
Q

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

A

small commercial income property

26
Q

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

A

sale of real estate

27
Q

What is the exclusion for capital gain?

A

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

28
Q

A homeowner may reduce taxable income by deducting _______ and ________

A

interest
taxes

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

29
Q

CAP Rate = NOI / Sale Price

A
30
Q

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

A

increase

decrease

31
Q

CAP Rate equals…

A

NOI / sale price

32
Q

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

A

small residential properties of four units or less

rental income only

33
Q

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

A

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

34
Q

Formulas for GRM and GIM

A

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

35
Q

How do you find the multiplier for GRM or GIM

A

Use comparable properties

Sale price / monthyl rent = multiplier

36
Q

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

A

capital recovery

37
Q

How do you find the effective gross income of a property

A

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

38
Q

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

A

debt service

39
Q

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

A

decrease the value of the property

40
Q

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

A

net income

Real Estate Exam (19 decks)

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