Hawaii Pre-Licensing National Practice Exam

Which valuation method is most significant in determining the value of an office building?

1. Cost approach

2. Sales comparison approach

3. Income approach

4. Market approach

The correct answer is: Income approach

The income approach is particularly significant in determining the value of an office building because it focuses on the income that the property is expected to generate over time. This method is suitable for investment properties, where the primary concern for most buyers is the potential return on investment. In the case of an office building, the income approach assesses the rental income that can be derived from leasing out the space to tenants. By analyzing factors such as current rental rates, occupancy levels, and operational expenses, this approach calculates the net operating income (NOI) of the property. Following this, investors apply a capitalization rate to the NOI to derive the property's value. This method aligns directly with the investor's perspective, as the value is derived from the building's ability to generate revenue, which is critical for making informed investment decisions. While other valuation methods, like the cost approach and sales comparison approach, do have their merits, they are generally less applicable in the context of income-generating properties such as office buildings. The cost approach focuses on the cost to reproduce the property, and the sales comparison approach examines comparable property sales, which may not adequately reflect an income-producing asset’s potential. Thus, for an office building specifically, the income approach stands out as the most pertinent