Property ValuationIntermediateCalifornia Exam

Which factor would most likely increase the capitalization rate an investor requires for an income property?

AA prime location with low vacancy rates

BA long-term, creditworthy tenant on a net lease

CHigh perceived risk due to a declining neighborhoodCorrect

DStable, predictable income with minimal management needs

Why High perceived risk due to a declining neighborhood Is Correct

Answer C: High perceived risk due to a declining neighborhood

Cap rate reflects the risk-return relationship: higher perceived risk demands a higher cap rate (and thus lower price for the same income). A declining neighborhood increases investment risk, causing investors to demand a higher cap rate.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

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Key Terms to Know

Capitalization Rate (Cap Rate)

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.

Gross Rent Multiplier (GRM)

A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.