California Real Estate Practice Exam

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Prepare for the California Real Estate Exam. Study with flashcards and questions featuring hints and explanations. Get exam-ready!

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An investor who owned a 16-unit apartment complex has experienced a decrease in monthly rent due to a newly installed freeway. By applying an 11% "cap rate," what is the resulting loss in value if monthly rent decreased by $320?

$32,468
$34,909
$40,908
$45,000

The correct answer is: $32,468

To determine the loss in value of the apartment complex based on a decrease in rent, we first calculate the annual decrease in income. Since the monthly rent decreased by $320, the annual decrease would be: Annual decrease = $320 x 12 months = $3,840. Next, we apply the capitalization rate, or "cap rate," to find the loss in value. The cap rate is a percentage that reflects the relationship between a property's net operating income and its value. In this case, the cap rate is 11% (or 0.11 as a decimal). To calculate the resulting loss in value, we use the formula: Loss in value = Annual decrease / Cap rate. So, we calculate: Loss in value = $3,840 / 0.11 = $34,909.09. Rounding this value gives us $34,909, which corresponds to the choice provided. This calculation shows how a decrease in rental income directly impacts the property's overall value based on the cap rate, which is a standard practice in real estate valuation. Therefore, understanding the relationship between income, cap rate, and property value is crucial for investors assessing their investments in real estate.