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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The value of an investment is as follows: Total value = V(t) = $300,000; Income attributable to building = $21,600; Reasonable "cap rate" = 9%. What is the value of the land?

$80,000
$60,000
$90,000
$70,000

The correct answer is: $80,000

To determine the value of the land, we first need to understand how the capitalization rate (cap rate) and income relate to the overall valuation of real estate. The cap rate is used to estimate the value of an income-generating property based on the income it produces. The formula is: Value = Income / Cap Rate By substituting the given figures into this formula, we calculate the value of the building. The income attributable to the building is $21,600 and the reasonable cap rate is 9% (or 0.09 in decimal form): Value of the building = $21,600 / 0.09 = $240,000 Now that we have the value of the building, we can find the value of the land by subtracting the value of the building from the total value of the property: Value of the land = Total value - Value of the building Value of the land = $300,000 - $240,000 = $60,000 Thus, the value of the land is $60,000, making this the correct option. This value represents the amount of the property’s total worth that is attributed specifically to the land itself. Other choices misrepresent either the calculations or the relationship between