Real Estate Appraisal Practice Exam

Which approach to finding value would a licensed appraiser likely weigh most heavily when appraising a three-unit rental property?

1. Cost approach

2. Sales comparison approach

3. Income approach

4. Market value approach

The correct answer is: Income approach

The income approach is the most relevant method for appraising a three-unit rental property due to its focus on the property's potential to generate income. This approach evaluates the property's value based on the income it can produce, taking into account projected rental income and operating expenses. For a multi-unit rental property, potential investors are primarily interested in the income-generating capability. The income approach involves calculating the net operating income (NOI) and applying a capitalization rate to determine the property's value. This method is particularly effective for income-producing properties, as it directly links the appraisal value to the financial performance of the investment. In contrast, the cost approach, while useful for new constructions or unique properties, may not accurately reflect the market dynamics for existing rental properties where revenue generation is a significant consideration. Similarly, the sales comparison approach, while helpful in assessing properties with similar characteristics, may not account for the specific income potential of a rental property. The market value approach is a broader concept and does not specifically hone in on the income aspect, which is vital for rental properties. Thus, when assessing a three-unit rental property, the income approach provides the most relevant and effective measure of value, aligning the appraisal closely with the property's financial prospects.