karoliukas

All of the following variables might be factors when calculating the net operating income (NOI) for a property EXCEPT:

A) collection losses.

B) insurance.

C) depreciation.

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Insurance expenses and collection losses for a property are all factors in the NOI calculation. Depreciation is not a factor when calculating NOI because a basic, underlying assumption is that routine repairs and maintenance will keep the property in its existing condition.

karoliukas

An investor is considering purchasing an office building that is currently 95% leased.

Gross potential rental income	$105,000
Insurance and taxes	$9,000
Repairs and maintenance	$15,000
Depreciation	$11,000

What is the building's net operating income (NOI), based on the above table?

A) $75,750.

B) $64,750.

C) $81,000.

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NOI can be calculated as gross rental income minus vacancy losses, insurance and taxes, and repairs and maintenance. Depreciation is not a factor in calculating NOI. NOI for the building is $105,000 – ($105,000 × 5%) - $9,000 - $15,000 = $75,750.

karoliukas

Johnson is considering the purchase of Happy Valley Acres, a 300-unit apartment complex. She has hired Carson, CFA, to advise her on the investment. Carson has estimated the following data for Happy Valley’s next accounting period:

• Potential rental income = $3.80 million.
• Vacancy rate = 3.5%.
• Insurance costs = $250,000.
• Financing costs = $940,000.
• Property taxes = $400,000.
• Utility expense = $120,000.
• Repair costs = $200,000.
• Depreciation = $350,000.
• Required return = 8%.

The property’s net operating income (NOI) and value should be closest to:

NOI

Value

A) $2.83 million $33.75 million

B) $2.70 million $33.75 million

C) $2.70 million $21.60 million

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NOI = rental income × (1 − vacancy rate) − insurance costs − property taxes − utility expense − repair costs
NOI = $3.80 million × (96.5%) − 250,000 − 400,000 − 120,000 − 200,000 = 2.70 million
Value of building = 2.70 million / 0.08 = 33.75 million

karoliukas

The portfolio manager of a large real estate investment trust (REIT) has identified an office building as a potential investment. Based upon the following data, what is its net operating income (NOI)?

Gross potential rental income	$235,000
Estimated vacancy and collection loss rate	6%
Insurance and taxes	$15,000
Repairs and maintenance	$17,000
Utilities	$12,500
Cost of equity	11%

A) $176,400.

B) $150,550.

C) $190,500.

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The NOI is $235,000 – ($235,000 × 6%) − $15,000 − $17,000 − $12,500 = $176,400. The cost of equity number is not needed, because the NOI calculation is independent of any financing arrangements.

karoliukas

Net operating income (NOI) is calculated by subtracting which of the following from the property's gross potential rental income?

A) Depreciation.

B) Property taxes.

C) Income taxes.

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NOI does not consider income taxes, financing charges, or depreciation.

karoliukas

The income approach to valuing real estate is most similar to the following method of valuing common stock?

A) Dividend discount model with zero growth.

B) Dividend discount model with normal growth.

C) Price-to-sales ratio.

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The income approach for valuing real estate uses the following formula:
Appraised Pricereal estate = annual net operating income (NOI) / Market Capitalization Rate (R)
The dividend discount model (DMM) with zero growth approach for valuing common stock uses the following formula:
Pricecommon stock = Dividend (D) / (Required Rate of Return on the Stock (k) - Growth (g))
When g = 0, the formulas simplify to:
Appraised Pricereal estate = NOI / R
Pricecommon stock = D / k
or, a period cash flow divided by a rate of return.
The DMM with normal growth would not be a correct response because the income approach for real estate assumes a constant (no growth) NOI stream to perpetuity.

karoliukas

Based upon the following information, what is the net operating income (NOI) of the property?

Estimated Market Value	$600,000
Capitalization Rate	20%
Taxes	$27,000
Operating Expenses	$107,000

A) $120,000.

B) $104,000.

C) $98,600.

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MV = NOI / CAP
To solve for NOI, rewrite the formula as: MV × CAP = NOI
600,000 × 0.2 = 120,000

karoliukas

Jill Booton is evaluating an apartment building as a possible investment to add to her portfolio. She has been told that real estate is a good addition to a portfolio for diversification purposes. Jill will not be able to handle the maintenance issues at the complex and thus must hire a full-time maintenance employee at $35,000 per year. She will also hire a full-time manager at $40,000 per year. Property taxes are expected to be $75,000 per year and insurance will be another $25,000. If fully occupied, the gross rental income from the property will be $850,000. Due to the location of the building, Jill estimates a very low vacancy rate of 3.5 percent annually. The net operating income of the property is closest to:

A) $825,250.

B) $4,963,462.

C) $645,250.

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NOI = $850,000 – ($850,000 x 0.035) – $35,000 – $40,000 – $25,000 – $75,000 = $645,250.

karoliukas

Which of the following statements regarding real estate valuation is CORRECT?

A) Each property is unique, so the investment value may be dependent upon the particular use planned for the property.

B) The estimated market value of a property depends upon the particular investor.

C) The most reliable real estate valuation method is the cost approach.

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The market value is completely independent of any considerations based upon the investor or potential investor. There is not a “most reliable” valuation method – all have their advantages and disadvantages. The investment value may be dependent upon the planned use of the property—remember that market value and investment value are two different things.

karoliukas

Which of the following is least likely a characteristic of the income method for real estate valuation?

A) Account for the effects of income taxes.

B) Require a discounted cash flow model.

C) Ignore future changes in operating income.

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The income method does not consider the investment’s income-tax implications. However, it does use a discounted cash flow model based on net operating income. The income method does not account for potential changes in operating income.