IAAO Course 102 – Income Approach to Valuation:
Exam Questions And Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A | Instant
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1. What is the primary purpose of the income approach in property
valuation?
A. To determine replacement cost
B. To estimate the present value of future benefits
C. To analyze market trends
D. To calculate land value
The income approach focuses on the value derived from the
income a property can generate.
2. Which of the following is considered a direct capitalization
method?
A. Discounted cash flow analysis
B. Gross income multiplier (GIM)
C. Sales comparison approach
D. Cost approach
Direct capitalization uses a single-period income estimate and a
capitalization rate to estimate value.
3. Which of the following best describes net operating income (NOI)?
A. Total income minus debt service
B. Total income minus depreciation
C. Income remaining after operating expenses but before debt
, service and taxes
D. Gross income minus taxes only
NOI measures the income a property produces from operations,
excluding financing costs.
4. Which expense is NOT typically included in operating expenses?
A. Property management fees
B. Utilities
C. Mortgage principal payments
D. Maintenance
Operating expenses are recurring costs to operate the property,
excluding financing costs.
5. The capitalization rate is defined as:
A. The rate of return on an investment based on NOI and
property value
B. Interest rate on a mortgage
C. Rate of property tax
D. Annual insurance rate
The capitalization rate (cap rate) converts income into value by
reflecting investor expectations.
6. When using a direct capitalization method, the formula for
property value is:
A. Value = NOI × Cap rate
B. Value = NOI – Expenses
C. Value = NOI ÷ Cap rate
D. Value = Gross Income × Vacancy Rate
Direct capitalization divides NOI by the capitalization rate to
estimate property value.
,7. Which type of income is typically used in the income approach?
A. Gross potential income
B. Effective gross income (EGI)
C. Replacement cost
D. Land residual
EGI accounts for vacancy and collection losses, providing a realistic
income estimate.
8. What does a gross income multiplier (GIM) measure?
A. Operating expenses as a percentage of income
B. Relationship between sale price and gross income
C. Property depreciation
D. Capital improvements
GIM is a simple ratio comparing the sale price of similar properties
to their gross income.
9. Which of the following is a limitation of the income approach?
A. Requires extensive market data
B. Not suitable for owner-occupied properties
C. Accuracy depends on reliable income and expense data
D. Cannot be used for rental properties
If income and expense estimates are inaccurate, the valuation will
also be inaccurate.
10. In a discounted cash flow (DCF) analysis, which of the
following is discounted?
A. Replacement cost
B. Future net cash flows
C. NOI only for the first year
D. Historical sale prices
, DCF converts projected future cash flows to present value using a
discount rate.
11. The reversion or terminal value in a DCF analysis represents:
A. Annual operating expenses
B. Estimated sale price at the end of the holding period
C. Initial property cost
D. Depreciation over the holding period
Terminal value accounts for the expected value when the property
is sold in the future.
12. Which of the following would increase the value of a
property under the income approach?
A. Higher vacancy rate
B. Higher operating expenses
C. Higher net operating income
D. Higher interest rates
Higher NOI directly increases value when capitalized.
13. Effective gross income (EGI) is calculated by:
A. Gross income – operating expenses
B. Potential gross income – vacancy and collection losses + other
income
C. NOI ÷ Cap rate
D. Replacement cost × depreciation
EGI adjusts potential income for realistic occupancy and adds non-
rental income.
14. A building has an NOI of $120,000 and a cap rate of 8%. Its
estimated value is:
A. $900,000
Exam Questions And Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A | Instant
Download Pdf
1. What is the primary purpose of the income approach in property
valuation?
A. To determine replacement cost
B. To estimate the present value of future benefits
C. To analyze market trends
D. To calculate land value
The income approach focuses on the value derived from the
income a property can generate.
2. Which of the following is considered a direct capitalization
method?
A. Discounted cash flow analysis
B. Gross income multiplier (GIM)
C. Sales comparison approach
D. Cost approach
Direct capitalization uses a single-period income estimate and a
capitalization rate to estimate value.
3. Which of the following best describes net operating income (NOI)?
A. Total income minus debt service
B. Total income minus depreciation
C. Income remaining after operating expenses but before debt
, service and taxes
D. Gross income minus taxes only
NOI measures the income a property produces from operations,
excluding financing costs.
4. Which expense is NOT typically included in operating expenses?
A. Property management fees
B. Utilities
C. Mortgage principal payments
D. Maintenance
Operating expenses are recurring costs to operate the property,
excluding financing costs.
5. The capitalization rate is defined as:
A. The rate of return on an investment based on NOI and
property value
B. Interest rate on a mortgage
C. Rate of property tax
D. Annual insurance rate
The capitalization rate (cap rate) converts income into value by
reflecting investor expectations.
6. When using a direct capitalization method, the formula for
property value is:
A. Value = NOI × Cap rate
B. Value = NOI – Expenses
C. Value = NOI ÷ Cap rate
D. Value = Gross Income × Vacancy Rate
Direct capitalization divides NOI by the capitalization rate to
estimate property value.
,7. Which type of income is typically used in the income approach?
A. Gross potential income
B. Effective gross income (EGI)
C. Replacement cost
D. Land residual
EGI accounts for vacancy and collection losses, providing a realistic
income estimate.
8. What does a gross income multiplier (GIM) measure?
A. Operating expenses as a percentage of income
B. Relationship between sale price and gross income
C. Property depreciation
D. Capital improvements
GIM is a simple ratio comparing the sale price of similar properties
to their gross income.
9. Which of the following is a limitation of the income approach?
A. Requires extensive market data
B. Not suitable for owner-occupied properties
C. Accuracy depends on reliable income and expense data
D. Cannot be used for rental properties
If income and expense estimates are inaccurate, the valuation will
also be inaccurate.
10. In a discounted cash flow (DCF) analysis, which of the
following is discounted?
A. Replacement cost
B. Future net cash flows
C. NOI only for the first year
D. Historical sale prices
, DCF converts projected future cash flows to present value using a
discount rate.
11. The reversion or terminal value in a DCF analysis represents:
A. Annual operating expenses
B. Estimated sale price at the end of the holding period
C. Initial property cost
D. Depreciation over the holding period
Terminal value accounts for the expected value when the property
is sold in the future.
12. Which of the following would increase the value of a
property under the income approach?
A. Higher vacancy rate
B. Higher operating expenses
C. Higher net operating income
D. Higher interest rates
Higher NOI directly increases value when capitalized.
13. Effective gross income (EGI) is calculated by:
A. Gross income – operating expenses
B. Potential gross income – vacancy and collection losses + other
income
C. NOI ÷ Cap rate
D. Replacement cost × depreciation
EGI adjusts potential income for realistic occupancy and adds non-
rental income.
14. A building has an NOI of $120,000 and a cap rate of 8%. Its
estimated value is:
A. $900,000
