Texas Crammer Practice Exam

For a property converted into multiple apartments, what is the preferred method of determining its value?

1. Cost approach

2. Market approach

3. Income approach

4. Sales comparison approach

The correct answer is: Income approach

When determining the value of a property that has been converted into multiple apartments, the income approach is often the preferred method. This is primarily because the income approach evaluates a property's value based on its ability to generate revenue. In the case of multi-family units or apartment buildings, investors and appraisers typically look at the potential rental income that the property can produce. The income approach involves calculating the net operating income (NOI) of the property, which is the income generated from rents minus operating expenses. This information is then capitalized to estimate the market value of the property. This method makes it particularly relevant for income-producing properties, as it directly correlates the property's value to its profitability. Although other methods like the cost approach, market approach, or sales comparison approach can provide insights into property value, they do not focus as directly on the income-generating potential that is crucial for specialized properties like apartments. The income approach thus gives a clear picture of value in the context of investment and rental income, making it the preferred choice for this type of property.