Illinois Real Estate Practice Exam

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Prepare for the Illinois Real Estate Test. Practice with flashcards and multiple choice questions, each question has hints and explanations. Get ready for your exam!

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What is the value of an apartment building using the income approach if it generates a gross income of $60,000, operating expenses of $10,000, and a capitalization rate of 8%?

500,000
525,000
600,000
625,000

The correct answer is: 625,000

To determine the value of the apartment building using the income approach, you'll start by calculating the net operating income (NOI). The net operating income is found by subtracting operating expenses from the gross income. In this scenario, the gross income is $60,000, and the operating expenses are $10,000: Net Operating Income (NOI) = Gross Income - Operating Expenses NOI = $60,000 - $10,000 = $50,000 Once you have the net operating income, you can calculate the property value using the capitalization rate. The formula used is: Value = Net Operating Income / Capitalization Rate Given that the capitalization rate is 8% (or 0.08 when expressed as a decimal): Value = $50,000 / 0.08 Value = $625,000 Therefore, the correct value of the apartment building, according to the income approach, is $625,000. This aligns with option D. This calculation exemplifies how the income approach is utilized in real estate appraisals, focusing on the income-generating capability of the property, which is fundamental in evaluating investment properties.