A single-family rental is best valued by GRM rather than direct capitalization primarily because:
Correct Answer
B) Buyers of houses price rent multiples; single-house expense data is thin
Why this is correct: The choice of method should follow market behavior. For single-family rentals, investors and the market often think in terms of price-to-rent multiples (GRM). Furthermore, reliable, property-specific expense data for a single house is often unavailable or too volatile to support a credible direct capitalization analysis. Why the other choices are wrong: Appreciation rates are not the basis for choosing an income method. Cap rates are not illegal for any property type. GRM does not incorporate financing terms; it uses gross income. Exam tip: Use GRM for small residential rentals where the market uses it and expense data is thin. Use direct cap for larger income properties where NOI is stable and the market thinks in yields.
Why This Is the Correct Answer
Why this is correct: The choice of method should follow market behavior. For single-family rentals, investors and the market often think in terms of price-to-rent multiples (GRM). Furthermore, reliable, property-specific expense data for a single house is often unavailable or too volatile to support a credible direct capitalization analysis. Why the other choices are wrong: Appreciation rates are not the basis for choosing an income method. Cap rates are not illegal for any property type. GRM does not incorporate financing terms; it uses gross income. Exam tip: Use GRM for small residential rentals where the market uses it and expense data is thin. Use direct cap for larger income properties where NOI is stable and the market thinks in yields.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
Next Question
A property's NOI is $88,000 and comparable sales indicate rates of 6.5%, 6.8% and 7.1%. Using 6.8%, the indicated value is: