Humber/Ontario Real Estate Course 2 Exam Practice

What is a significant disadvantage of using the income approach in property valuation?

1. Difficulty in making adjustments for differences between comparable properties.

2. Difficulty in getting exact construction costs.

3. Difficulty in accurately estimating depreciation.

4. Inability to precisely determine the overall capitalization rate using marketplace data.

The correct answer is: Inability to precisely determine the overall capitalization rate using marketplace data.

The correct answer is D, the inability to precisely determine the overall capitalization rate using marketplace data. This is a significant disadvantage of using the income approach in property valuation because the capitalization rate plays a crucial role in determining the value of income-producing properties. In the income approach, the value of a property is calculated by dividing the net operating income (NOI) by the capitalization rate. The capitalization rate is the rate of return that investors expect to receive on a property. If the overall capitalization rate cannot be precisely determined using marketplace data, it can lead to inaccuracies in the valuation of the property. In contrast, options A, B, and C are not significant disadvantages of using the income approach in property valuation. Making adjustments for differences between comparable properties, getting exact construction costs, and accurately estimating depreciation are challenges that are part of the valuation process but are not as critical as the precise determination of the capitalization rate.