13.When using the Income Approach if the capitalisation rate decreases what is t
ID: 423055 • Letter: 1
Question
13.When using the Income Approach if the capitalisation rate decreases what is the impact on the value of a property (all other things remaining equal)?
a. There will be no impact on the valuation if the income remains the same
b. The value will increase
c. It could either rise or fall, dependent on market rental growth
d. The valuation will remain unchanged
e. The valuation will decrease
14. Why is property considered an illiquid investment, generally?
a. Transactions are complex and require more time to complete than other investments
b. Supply is inelastic over the short to medium term
c. Heterogeneity of the product increases risk
d. This generalization applies to direct property investment only
e. Both a and d are correct
15. A gross lease is preferred by landlords because:
a. The risk of operating cost inflation lies with the tenant
b. Gross rentals are higher than net rentals
c. Tenants prefer the certainty of a fixed rental cost
d. The rental cashflow is fixed
e. None of the above, landlords prefer net leases
16. If a landlord needs to replace the roof of a large commercial property in 15 years’ time for $600,000 how much will need to be put aside at the beginning of each year if the funds are invested as an interest rate of 4% per annum (to the nearest dollar)?
a. $27,068
b. $40,000
c. $28,812
d. $35,301
e. None of the above
Explanation / Answer
Answer 13: Option B: The value will increase
In other words, as the cap rate goes up, the valuation multiple goes down.
Capitalization rate = Net operating Income / value
Answer 14: Option A: Transactions are complex and require more time to complete than other investments
Property is considered as a illiquid investment because illiquid assets are those assets which cannot be readily sold for cash without any loss of values. Not even property even cars, antiques; stock is also examples of illiquid assets. In which you have to buy the proper buyer who can purchase their property on at actual rate. So these are very complex and more time consuming transactions
Answer 15: Option C: Tenants prefer the certainty of a fixed rental cost
A gross lease is preferred by landlords because in which all the expense are associated such as utilities and janitorial services. This lease are preferred by tenants because it also include also include property insurance and taxes, but these must be carefully negotiated.
Answer 16: Option E: None of the above
4% interest is available for each year.
So the owner need to put 38462 for every year and 4 % interest is there. So 38462 + 4% of 38462 is 40000.48 so the total amount is for 15 years is 40000.48*15= $600007.2
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