Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is the most common method used for determining property value?

1. Cost approach

2. Income capitalization

3. Sales comparison

4. Replacement cost

The correct answer is: Income capitalization

The income capitalization approach is often considered the most common method used for determining property value, especially in the context of investment properties. This method focuses on the income that a property generates. By estimating the net operating income (NOI) and applying a capitalization rate, investors can determine the overall value of the property based on its capacity to generate revenue. This approach is particularly relevant for multifamily residences and commercial real estate, as it directly correlates to the investment potential of the property. Investors are primarily interested in the return on investment, and the income capitalization method aligns perfectly with this perspective by providing a clear picture of how much income a property can yield over time. In comparison, the cost approach evaluates property value based on the cost to replace or reproduce it. While this can provide useful insights, it does not account effectively for market conditions or the income-generating ability of a property, making it less common for valuation in investment scenarios. The sales comparison method, while relevant and frequently used, typically applies to residential properties and relies on comparable sales data, which may not always reflect unique situations or market fluctuations. Similarly, the replacement cost method estimates the value based on construction costs, which does not directly relate to the potential income or market demand for a property,