Certified Residential Appraiser Practice Exam

What is the term for income that is expected to reflect the relationship between income and total property value?

1. Overall Yield Rate

2. Income Rate

3. Fixed Expenses

4. Reversion

The correct answer is: Income Rate

The term "Income Rate" refers to the ratio used to assess the relationship between the income generated by a property and its total value. This rate is crucial in the income approach to valuation, a method commonly used by appraisers to estimate the value of income-producing properties. The Income Rate allows appraisers to determine what portion of the property's value is attributable to the income it generates. By applying the Income Rate to a property’s expected income, appraisers can arrive at a value estimate that reflects the property's earning potential. This approach underscores the principle of substitution, where an investor is likely to pay no more for a property than the cost of obtaining a comparable property with similar income-earning potential. The overall yield rate could encompass various income sources and may not necessarily focus solely on the direct relationship between income and property value. Fixed expenses relate to regular costs incurred regardless of property income and do not directly connect to the income-to-value assessment. Reversion often pertains to the potential future value of an investment at the end of a projected holding period, which is distinct from the immediate income relationship being described.