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IAAO 102 Income Approach Practice
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 to valuation?
A. To estimate construction cost
B. To estimate value based on anticipated income
C. To determine replacement reserves
D. To measure land area
Answer: B. To estimate value based on anticipated income
Rationale: The income approach converts the anticipated future benefits of
property ownership into an indication of present value.
2. Which type of property is generally most suitable for valuation using the
income approach?
A. Owner-occupied single-family residence
B. Income-producing apartment building
C. Vacant residential lot
D. Public park
Answer: B. Income-producing apartment building
,Rationale: Income-producing properties can be analyzed by relating expected
income and expenses to value.
3. What does capitalization mean in the income approach?
A. Converting income into an indication of value
B. Converting value into land area
C. Estimating construction materials
D. Calculating depreciation only
Answer: A. Converting income into an indication of value
Rationale: Capitalization transforms an expected income stream into a present
value estimate.
4. Which formula represents direct capitalization?
A. Value = Expenses × Rate
B. Value = NOI ÷ Capitalization Rate
C. Value = Income × Expenses
D. Value = Capitalization Rate ÷ NOI
Answer: B. Value = NOI ÷ Capitalization Rate
Rationale: Direct capitalization divides stabilized net operating income by the
appropriate overall capitalization rate.
5. What does NOI stand for?
A. Net Operating Income
B. Net Ownership Investment
C. New Operating Index
D. Normal Occupancy Income
Answer: A. Net Operating Income
Rationale: Net operating income is the income remaining after appropriate
operating expenses are deducted from effective gross income.
6. Which item is normally deducted when calculating net operating income?
,A. Mortgage principal
B. Operating expenses
C. Property owner's income tax
D. Depreciation for federal income-tax purposes
Answer: B. Operating expenses
Rationale: Operating expenses are deducted from effective gross income to
determine NOI.
7. Which item is generally not considered an operating expense for purposes
of NOI?
A. Property insurance
B. Routine maintenance
C. Property management
D. Mortgage principal repayment
Answer: D. Mortgage principal repayment
Rationale: Debt service is a financing expense rather than a property operating
expense and is normally excluded from NOI.
8. What is potential gross income?
A. Income after all expenses
B. Maximum anticipated income before vacancy and collection losses
C. Income after debt service
D. Net income after taxes
Answer: B. Maximum anticipated income before vacancy and collection losses
Rationale: Potential gross income represents the total income that could be
generated under full occupancy and collection assumptions before applicable
losses.
9. What is effective gross income?
A. Potential gross income less vacancy and collection losses, plus other applicable
income
, B. Potential gross income plus debt service
C. NOI plus depreciation
D. Market value less expenses
Answer: A. Potential gross income less vacancy and collection losses, plus other
applicable income
Rationale: Effective gross income reflects the income actually expected to be
collected, together with appropriate ancillary income.
10.A property has a net operating income of $90,000 and a capitalization rate
of 9%. What is its indicated value?
A. $810,000
B. $900,000
C. $1,000,000
D. $1,100,000
Answer: C. $1,000,000
Rationale: Value = $90,000 ÷ 0.09 = $1,000,000.
11.If NOI remains constant while the capitalization rate decreases, what
generally happens to value?
A. Value decreases
B. Value remains unchanged
C. Value increases
D. Value becomes zero
Answer: C. Value increases
Rationale: Because value equals NOI divided by the capitalization rate, a lower
rate produces a higher value when NOI is unchanged.
12.Which principle is especially important when selecting comparable income
properties?
A. Similarity of economic characteristics
B. Similarity of owner's personal preferences
IAAO 102 Income Approach Practice
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 to valuation?
A. To estimate construction cost
B. To estimate value based on anticipated income
C. To determine replacement reserves
D. To measure land area
Answer: B. To estimate value based on anticipated income
Rationale: The income approach converts the anticipated future benefits of
property ownership into an indication of present value.
2. Which type of property is generally most suitable for valuation using the
income approach?
A. Owner-occupied single-family residence
B. Income-producing apartment building
C. Vacant residential lot
D. Public park
Answer: B. Income-producing apartment building
,Rationale: Income-producing properties can be analyzed by relating expected
income and expenses to value.
3. What does capitalization mean in the income approach?
A. Converting income into an indication of value
B. Converting value into land area
C. Estimating construction materials
D. Calculating depreciation only
Answer: A. Converting income into an indication of value
Rationale: Capitalization transforms an expected income stream into a present
value estimate.
4. Which formula represents direct capitalization?
A. Value = Expenses × Rate
B. Value = NOI ÷ Capitalization Rate
C. Value = Income × Expenses
D. Value = Capitalization Rate ÷ NOI
Answer: B. Value = NOI ÷ Capitalization Rate
Rationale: Direct capitalization divides stabilized net operating income by the
appropriate overall capitalization rate.
5. What does NOI stand for?
A. Net Operating Income
B. Net Ownership Investment
C. New Operating Index
D. Normal Occupancy Income
Answer: A. Net Operating Income
Rationale: Net operating income is the income remaining after appropriate
operating expenses are deducted from effective gross income.
6. Which item is normally deducted when calculating net operating income?
,A. Mortgage principal
B. Operating expenses
C. Property owner's income tax
D. Depreciation for federal income-tax purposes
Answer: B. Operating expenses
Rationale: Operating expenses are deducted from effective gross income to
determine NOI.
7. Which item is generally not considered an operating expense for purposes
of NOI?
A. Property insurance
B. Routine maintenance
C. Property management
D. Mortgage principal repayment
Answer: D. Mortgage principal repayment
Rationale: Debt service is a financing expense rather than a property operating
expense and is normally excluded from NOI.
8. What is potential gross income?
A. Income after all expenses
B. Maximum anticipated income before vacancy and collection losses
C. Income after debt service
D. Net income after taxes
Answer: B. Maximum anticipated income before vacancy and collection losses
Rationale: Potential gross income represents the total income that could be
generated under full occupancy and collection assumptions before applicable
losses.
9. What is effective gross income?
A. Potential gross income less vacancy and collection losses, plus other applicable
income
, B. Potential gross income plus debt service
C. NOI plus depreciation
D. Market value less expenses
Answer: A. Potential gross income less vacancy and collection losses, plus other
applicable income
Rationale: Effective gross income reflects the income actually expected to be
collected, together with appropriate ancillary income.
10.A property has a net operating income of $90,000 and a capitalization rate
of 9%. What is its indicated value?
A. $810,000
B. $900,000
C. $1,000,000
D. $1,100,000
Answer: C. $1,000,000
Rationale: Value = $90,000 ÷ 0.09 = $1,000,000.
11.If NOI remains constant while the capitalization rate decreases, what
generally happens to value?
A. Value decreases
B. Value remains unchanged
C. Value increases
D. Value becomes zero
Answer: C. Value increases
Rationale: Because value equals NOI divided by the capitalization rate, a lower
rate produces a higher value when NOI is unchanged.
12.Which principle is especially important when selecting comparable income
properties?
A. Similarity of economic characteristics
B. Similarity of owner's personal preferences
