Lesson 3 Exercises – Assumptions of the Income Approach (The Income Approach to Value)

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  1. Value is created by the anticipation of:
    1. Market rent
    2. Gross income
    3. Current benefits
    4. Future benefits

d. Future benefits

Explanation: The income approach to value is based on the principle of anticipation, which states that value changes in expectation of some future benefit or detriment affecting the property.

  1. Before investing in a property, investors should estimate:
    1. How long the income stream will last
    2. How much income they will receive
    3. The risks involved
    4. All of the above

d. All of the above

Explanation: Investors should estimate the quantity, quality, and duration of the future income stream.

  1. If you expect to receive $10,000 a year for the next 10 years for rent on your property, the payments that you would receive would total $100,000. Would you prefer to:
    1. Receive $100,000 today
    2. Wait to receive $10,000 a year payments for the next 10 years
    3. $50,000 paid today and $50,000 paid in one year
    4. They are all worth the same

a. Receive $100,000 today

Explanation: the amount of money is the same, but most people would prefer to receive the full amount of the payments. There is a time value of money. If you had the money today, you could invest it somewhere else and receive a return on that investment over the next 10 years.

  1. The principle of substitution can be applied to:
    1. The cost approach
    2. The capitalization of income approach
    3. The comparative sales approach
    4. Any of the approaches, depending upon the circumstances

d. Any of the approaches, depending upon the circumstances

Explanation: The cost approach assumes an owner will not pay more than the cost of buying a lot and constructing a building, assuming no untimely delay. The income approach assumes an investor will not pay more that the cost of making an equally profitable investment, assuming equal risks. The comparative sales approach assumes a buyer will not pay more for a property than the cost of buying a similar property.

  1. The principle of anticipation can be applied to:
    1. An apartment building
    2. A single-family residence
    3. A commercial structure
    4. All of the above

d. All of the above

Explanation: For the investor, virtually all multiple-residential, industrial, professional, and commercial properties are purchased with the vision future economic returns. In the case of the single-family residence, the return is the enjoyment of amenities in the future – a roof over one's head and a place to raise a family in a safe neighborhood with good schools; perhaps the amenities include an exclusive address, a quiet setting, or a coastline view. Homebuyers may also anticipate that the value of their home will increase future.