Income Approacheasy8.2% of exam

A replacement reserve of $350 per unit per year for a 24-unit building totals:

Correct Answer

B) $8,400 annually

Why this is correct: The annual replacement reserve is calculated per unit, then multiplied by the number of units. $350/unit/year × 24 units = $8,400/year. Why the other choices are wrong: "$350 annually for the property" is wrong because it applies the rate to only one unit, not the entire building. "$14,600 annually" is wrong; it's not a correct multiplication. "$4,200 annually at half the rate" is wrong; it incorrectly halves the rate or the unit count. Exam tip: Replacement reserves are per unit. Multiply the per-unit rate by the total number of units for the annual expense.

Answer Options

$350 annually for the property

$8,400 annually

$14,600 annually

$4,200 annually at half the rate

Why This Is the Correct Answer

Option B is correct because 24 units at $350 each per year totals $8,400 annually. The calculation honors both parts of the quoted rate, scaling across all units and leaving the annual basis untouched. Verification is straightforward: $8,400 divided by 24 returns $350, confirming the per-unit rate. This single figure is what enters the expense schedule.

Why the Other Options Are Wrong

Option A: $350 annually for the property

Reporting $350 for the entire property applies a per-unit rate as if it were a property-level total, ignoring the multiplication entirely. For a 24-unit building that would fund roughly one appliance every few years, which fails any plausibility check against real replacement costs for roofs, boilers, and flooring. Whenever a per-unit rate appears, the answer must scale with the unit count.

Option C: $14,600 annually

The $14,600 figure does not follow from the stem's numbers, since no combination of $350, 24, and the annual basis produces it. Because it sits above the correct answer, it may tempt candidates who sense the reserve should be substantial. An answer you cannot reproduce from the given figures should be discarded rather than rationalized.

Option D: $4,200 annually at half the rate

The $4,200 figure is $350 multiplied by 12, which mistakes the number of months for the number of units and then attaches a rationale about halving the rate that does not match its own arithmetic. There is no basis in the stem for adjusting the quoted rate at all. When an option supplies both a number and an excuse for it, verify the number first and let the excuse fall away.

Read the Denominator Twice

Per unit per year carries two instructions. Per unit says multiply by how many units. Per year says stop, you are already annual. Read the denominator twice and the arithmetic takes care of itself; nearly every wrong answer comes from honoring one qualifier and ignoring the other.

How to use: Underline both qualifiers in the quoted rate before computing, then scale by exactly what the denominator names. Sanity-check the result against the property's size, since a 24-unit building plainly needs more than a few hundred dollars a year in reserves. Finally, divide back by the unit count to confirm you recover the original rate.

Exam Tip

Divide your answer by the unit count as a check; if you do not land back on the quoted per-unit rate, the multiplication went wrong somewhere.

Common Mistakes to Avoid

-Applying a per-unit rate as though it were a property-level total
-Confusing months with units when scaling a quoted rate
-Omitting reserves entirely and overstating net operating income and value

Concept Deep Dive

Analysis

This question tests unit-rate arithmetic in an operating statement, where the risk is not the multiplication but the handling of the units. The reserve is quoted per unit per year, so both qualifiers must be honored: multiply by the number of units to cover the whole property, and recognize the result is already annual so no further conversion applies. Here $350 per unit per year times 24 units equals $8,400 per year, which then appears as a single line among operating expenses and reduces net operating income by that amount. Appraisers work constantly in unit rates of this kind, including dollars per square foot, per room, per pad, and per key, and the discipline is identical each time: read the denominator carefully and scale by exactly the quantity it names. Worth noting is the downstream effect, since at a 6 percent capitalization rate an $8,400 annual expense translates to about $140,000 of value, which is why an arithmetic slip on a reserve line is not a trivial error.

Background Knowledge

You need to know where reserves for replacement sit in a reconstructed operating statement and how they reduce net operating income. You should also be comfortable with the unit rates common in income property analysis, including per unit, per square foot, per room, and per key, and understand the value leverage of an expense line, since annual expense divided by the capitalization rate approximates its effect on value.

Real-World Application

Preparing a stabilized statement for a 24-unit property, an appraiser supports a $350 per unit reserve from component costs and remaining lives, enters $8,400 in the expense schedule, and notes that comparable sales used for rate extraction were restated to include reserves so the capitalization rate matches the subject's basis.

replacement reservesper unit expenseoperating expense scheduleannual reservenet operating income

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