Question 1

Reversionary returns from an investment do not include equity build-up from loan&#10;pay-off.

Accepted Answer

Reversionary returns from an investment include the equity build-up from loan pay-off, as this increases the owner's equity in the property over time.

Question 2

The future worth of one factor is used to calculate how much income is necessary to justify a given value.

Accepted Answer

The future worth of one factor is typically used in financial calculations to determine the future value of a present sum of money or a series of payments, not to calculate income necessary to justify a given value.

Question 3

Direct capitalization is usually the most reliable technique of income capitalization.

Accepted Answer

Direct capitalization is a widely accepted technique for income capitalization, and is considered reliable as it is based on the property's stabilized net operating income and a market-derived capitalization rate.

Question 4

Positive leverage results from an equity investment in a property that is earning a greater return than the cost of the loan money.

Accepted Answer

Positive leverage occurs when the return on an investment property is greater than the cost of the borrowed money (i.e. mortgage or loan). This results in an increase in the investor's overall return on investment.

Question 5

When the net income is divided by the sales price to derive a capitalization rate, the band of investment method is being used.

Accepted Answer

The band of investment method involves combining the mortgage and equity components to derive an overall capitalization rate, not dividing net income by the sales price.

Question 6

In appraisal, the interest rate means the same thing as yield rate.

Accepted Answer

In appraisal, interest rate and yield rate refer to the same thing. They both indicate the return on investment or the amount of interest a lender receives on the amount borrowed.

Question 7

The overall capitalization rate theoretically allows for a return on the investment, without any recapture.

Accepted Answer

The overall capitalization rate includes both the return on investment and potential recapture, so it does not allow for a return without any recapture.

Question 8

Income capitalization converts income to its value equivalent.

Accepted Answer

Income capitalization is a method used to determine the value of an income-producing property by converting its income into an estimated value. This is done by dividing the property's net operating income (NOI) by a capitalization rate, which represents the expected return on investment. Therefore, income capitalization does indeed convert income to its value equivalent.

Question 9

The equity residual technique analyzes the cash flow, rather than the net operating income from an investment.

Accepted Answer

The equity residual technique is a cash flow analysis approach used to determine the maximum amount an investor can pay for a property while still achieving a desired investment return. It takes into account the entire cash flow stream, including financing costs and eventual resale proceeds, to determine the amount of equity that will be left over for the investor after all other expenses and returns have been paid.

Question 10

A discount factor is used to adjust for the time value of money.

Accepted Answer

A discount factor is a mathematical formula used to adjust the value of expected future cash flows to account for the time value of money. It recognizes that money available today is worth more than the same amount of money available in the future due to the potential for investments or interest rates to change over time.

Deck 14: Income Capitalization: Rates and Techniques