Property Valuation
Depreciation in the cost approach to value is described as:
AThe decrease in value due only to physical deterioration
BThe loss in value from any cause, including physical deterioration, functional obsolescence, and external obsolescence✓ Correct
CAnnual tax depreciation allowed by the IRS
DOnly the wear and tear on the roof and HVAC
Explanation
Depreciation in the cost approach means loss in value from any cause: physical deterioration (wear and tear), functional obsolescence (design flaws), and external obsolescence (outside factors). All three types are considered.
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Key Terms to Know
Depreciation
A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
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.
Math Concepts
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