The rate of return an investor requires, used to convert income into value
Derived from comparable sales rather than invented: the rate at which similar properties in that market have been trading. It expresses risk, so a higher rate means buyers demand more return and therefore pay less for the same income.
How the exam asks about it
Read the relationship as well as the arithmetic. At constant income, a rising cap rate lowers value — which is one of the few genuinely conceptual maths items on the exam.
Land value plus the cost to build the improvements new, minus depreciation
Land is valued separately as though vacant, the improvements are costed at replacement or reproduction cost, accrued depreciation from every source is deducted, and the two are added. Land itself is never depreciated.
How the exam asks about it
Most reliable for new construction and for special-purpose property — schools, churches, libraries — where there are neither comparable sales nor a rental market.
Potential gross income less vacancy and collection losses, plus other income
Potential gross income assumes every unit is let and every tenant pays. Effective gross income is what the building actually collects, adjusted for vacancy and bad debt and increased by parking, laundry or storage income.
How the exam asks about it
The step order matters: potential gross, then effective gross, then net operating income. Items are built by skipping a step.
Sale price divided by gross rent, used as a quick comparison tool
A rough screening measure rather than a valuation method: it ignores expenses entirely, so two buildings with identical rents and very different operating costs produce the same multiplier.
How the exam asks about it
The GRM conventionally uses monthly rent and the gross income multiplier uses annual income. Reading which one is asked for is most of the item, since the two differ by a factor of twelve.
Valuing an investment property from the income it produces
Net operating income divided by a capitalization rate drawn from comparable sales. It is the approach investors actually think in, and it is the primary method for apartment buildings, offices and retail.
How the exam asks about it
Value = income ÷ rate. The same relationship rearranges into rate = income ÷ value and income = value × rate, and items use all three forms.
Effective gross income less operating expenses, before debt service
Deliberately excludes mortgage payments, depreciation and income tax, because those belong to a particular owner’s financing and tax position rather than to the property. That exclusion is exactly what makes NOI comparable between buildings.
How the exam asks about it
A question that includes a mortgage payment in the expense list is testing whether you subtract it. You do not.
The cost to build equivalent utility, versus the cost to build an exact copy
Replacement cost builds a structure of equivalent usefulness with current materials and methods. Reproduction cost builds an exact duplicate, period detail and all, which is why it is reserved for historic property.
How the exam asks about it
Replacement is the ordinary basis; reproduction is the exception, and mixing them up on a historic building is the point of the item.
Valuing a property against recent sales of similar properties
The primary approach for residential property. Comparables are adjusted for differences and the adjusted figures are reconciled into an indication of value. It rests directly on the principle of substitution.
How the exam asks about it
Adjustments are always made to the comparable, never to the subject: if the comparable is superior, subtract; if inferior, add.
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