Humber/Ontario Real Estate Course 3 Exam Practice

When establishing the value for an investor-owned triplex, which approach to valuation is most suitable?

1. The Direct Comparison Approach.

2. The Income Approach.

3. The Special Purpose Approach.

4. The Unit Comparison Approach.

5. The Market Value Approach.

6. The Cost Approach.

The correct answer is: The Income Approach.

The Income Approach is the most suitable method for establishing the value of an investor-owned triplex because it focuses on the income-generating potential of the property rather than its physical characteristics or market comparisons. Investors often seek properties that provide a steady cash flow and appreciate in value over time, making the Income Approach particularly relevant. This method analyzes the expected rental income the triplex can generate, deducting operating expenses to determine the net operating income (NOI). This NOI is then capitalized to arrive at the property's value, considering the return on investment that an investor would expect. It embraces the principle that the value of an income-generating property is directly tied to its ability to produce income, which is a critical factor for investors looking to maximize their returns. Alternatives such as the Direct Comparison Approach primarily focus on comparable sales and may not adequately reflect the property's performance as an income generator. Other methods like the Cost Approach assess the value based on the cost of construction and land value, overlooking the property's earning potential. Therefore, the Income Approach is uniquely aligned with the priorities of real estate investors, making it the most appropriate choice in this scenario.