Property Valuation
What is 'yield capitalization' (discounted cash flow analysis) versus 'direct capitalization'?
AThey produce different results and are never used together
BDirect capitalization converts one year's NOI into value (NOI ÷ cap rate); yield capitalization discounts multiple years of projected cash flows plus reversion to present value✓ Correct
CYield capitalization is used for residential; direct capitalization for commercial
DDirect capitalization is more accurate; yield capitalization is an approximation
Explanation
Direct capitalization is a simple method: Value = NOI ÷ Cap Rate, using one representative year's income. Yield capitalization (Discounted Cash Flow analysis) projects multiple years (typically 10) of cash flows and a terminal (reversion) value, then discounts all cash flows to present value using a discount rate that reflects the required yield. DCF is more appropriate for properties with changing income streams, lease rollovers, or significant capital expenditures.
Related Illinois Property Valuation Questions
- When an appraiser makes adjustments in the sales comparison approach, they adjust the:
- In a buyer's market, an appraiser would expect to see:
- A competitive market analysis (CMA) is typically prepared by a:
- An appraiser's final reconciled value in an appraisal report is typically:
- Functional obsolescence in a property refers to:
- The principle of anticipation in real estate valuation holds that value is created by:
- A comparable property sold for $290,000 one year ago. Market data shows values have increased 5% in the past year. What time-adjusted value would be used for this comparable?
- In appraising a historic property, which approach would likely be most challenging because the property has unique features not found in comparable sales?
Practice More Illinois Real Estate Questions
1,500+ questions covering all exam topics. Start free — no signup required.
Take the Free Illinois Quiz →