Real Estate Appraisal Practice Exam

What's the name of a process that estimates future income and then applies a discount rate to provide an investment's present value?

1. Cost analysis

2. Gross income multiplier

3. Yield capitalization

4. Sales comparison analysis

The correct answer is: Yield capitalization

The correct answer, yield capitalization, refers to a process used in real estate appraisal to estimate the present value of an investment property based on its expected future income. This method involves projecting the future cash flows that the property will generate, which typically includes rental income, and applying a discount rate. The discount rate reflects the risk level of the investment and the time value of money, allowing the appraiser to convert projected future income into a present value. This approach is particularly useful for income-producing properties where the anticipated revenue is a critical factor in determining value. Cost analysis, on the other hand, focuses on the expenditures required to replace or reproduce a property, rather than projecting future income. The gross income multiplier looks at the relationship between the gross income of the property and its price but does not involve discounting future income. Sales comparison analysis involves comparing similar properties that have sold recently, focusing on market value rather than income projections. Therefore, yield capitalization stands out as the method specifically aimed at valuing an investment based on expected income and its present worth.