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122 Principles of Real Estate II > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Equity build-up is the increase in the investor’s equity ratio as the portion of debt service payments devoted to principal accrue over time.

A. True
B. False

A

The correct answer is A. True.

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2
Q

A property is considered in foreclosure when the homeowner has not made a mortgage payment for at least 90 days.
A. True
B. False

A

A. True.

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3
Q

In its simplest form, a real estate syndicate is simply the pooling of money from numerous investors and organizing these funds as a whole into real estate projects.

A. True
B. False

A

A. True

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4
Q

Congress created Real Estate Investment Trust in 2016.
A. True
B. False

A

B. False.

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5
Q

The REITs, like every other investment in 2008, suffered greatly. But despite this, they continue to be an excellent addition to any diversified portfolio.
A. True
B. False

A

A. True.

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6
Q

Real estate investment clubs vary between those that focus on single family homes, and those that focus on commercial real estate.

A. True
B. False

A

A. True.

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7
Q

A two-to-four residential unit is not a popular investment for investors who are just starting out.
A. True
B. False

A

A. True.

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8
Q

Management fees eat into profits is one of the pros of an apartment complex.
A. True
B. False

A

B. False.

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9
Q

Real Estate investors can choose among many types of properties to generate attractive returns.
A. True
B. False

A

A. True.

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10
Q

Tom and Lily have decided to buy one house that cost $400,000. They will pay $ 200,000 down and borrow $200,000. When they do this, they will be:

A. 10% leveraged
B. 25% leveraged
C. 50% leveraged
D. 16% leveraged

A

C. 50% leveraged.

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11
Q 
Tom and Lily could also buy a new home for themselves. If they use their $200,000 as a 20% down payment, they can buy a home that costs:
A.      $1,000,000
B.      $500,000
C.      $100,000
D.      $50,000
A

A. $1,000,000.

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12
Q

With leverage, an investor uses borrowed capital to invest, expecting the profits made to be greater than the interest payable.

A. True
B. False

A

A. True.

Leverage amplifies possible returns, just like a lever can be used to amplify one’s strength when moving a heavy weight.

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13
Q

A real estate investment is an asset form with limited liquidity relative to other investments.

A. True
B. False

A

A. True.

As an example, cash is considered the most liquid of assets - its portable and immediately exchangeable. Tangible assets, such as real estate and fine art are all relatively illiquid

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14
Q

Which statement is NOT true regarding net operating income?

A. Net operating income measures an income-producing property’s profitability before adding in any costs from financing or taxes.
B. The operating expenses used in the NOI metric can be manipulated if a property owner waits on or advances certain income or expense items.
C. NOI helps real estate investors determine the capitalization rate. This helps investors calculate a property’s value, thus allowing a comparison of different investment properties for sale or purchase.
D. The NOI metric includes capital expenditures.

A

D. The NOI metric includes capital expenditures.

Capital expenditures, such as costs for a new air-conditioning system for an entire building, are not included in the NOI calculation.

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15
Q

In real estate, profit is created when the property is sold for more than the original purchase price plus the improvements made to it (accounting for any carrying charges).

A. True
B. False

A

A. True.

You’ve seen enough flipping shows to know this.

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16
Q

With a comparative market analysis, adjustments are made to the subject property.

A. True
B. False

A

B. False.

Adjustments are only made to comps; you never apply adjustments to the subject property.

17
Q

Which is NOT a role the syndicator plays?

A. Receives compensation for locating the property to be purchased
B. Performs the due diligence for acquisition
C. Has the ability to invest in real estate without hassles of property management
D. Gets the purchase to close

A

C. Has the ability to invest in real estate without hassles of property management.

This describes the investor who gets involved in a syndicate.

18
Q

A real estate mortgage investment conduit (REMIC) is a special purpose vehicle that is used to pool mortgage loans and issue mortgage-backed securities (MBS).

A. True
B. False

A

A. True.

Real estate mortgage investment conduits hold commercial and residential mortgages in trust and issue interests in these mortgages to investors. These securities then trade on the secondary mortgage market.

19
Q

A real estate investment trust (REIT) is a company owning and typically operating real estate which generates income.

A. True
B. False

A

A. True.

REITs generate a steady income stream for investors but offer little in the way of capital appreciation.

20
Q

What tax deduction is NOT allowed to investors?

A. Property tax
B. Management fees
C. Interest on the loan
D. Home improvements

A

D. Home improvements.

Other than a few special cases, you can’t deduct home improvements on your 1040.

21
Q

You can know the value of property before you buy it by:

A. Analyzing sold properties on MLS
B. Getting an appraisal
C. Getting a Broker’s Price Opinion
D. All of the above

A

D. All of the above.

Analyzing sold properties on MLS, getting an appraisal, and getting a Broker’s Price Opinion. Analyzing sold properties on MLS is a CMA. Broker’s Price Opinion is a BPO.

22
Q

Profit is created when the property is sold for more than:

A. The amount it was purchased for
B. The improvements made to it
C. Both A and B
D. None of the above

A

Both A and B.
The amount it was
purchased for and the improvements made to it. This is the way money is created.

23
Q 
To qualify for a 1031 Tax Deferred Exchange, the two properties must:
A. Be of like kind
B. Be one residential and one commercial
C. Be stocks and real estate
D. Be under $100,000
A

A. Be of like kind.

Real properties generally are of like kind, regardless of whether the properties are improved or unimproved.

24
Q

An appraisal is fairly close to a(n):

A. CMA
B. APOD
C. NOI
D. None of the above

A

A. CMA.

A CMA is a Comparative Market Analysis.

25
Q 
You can sell your property, pay no tax, and re-invest the profits into another property. This is possible via:
A. A 1099 Tax Deferred Exchange
B. An 891 Tax Deferred Exchange
C. A 1031 Tax Deferred Exchange
D. An 1111 Tax Deferred Exchange
A

C. A 1031 Tax Deferred Exchange.

1031 is the IRS form number.

26
Q

After repair value may greatly exceed purchase price, and longer tenant leases can yield a higher annual ROI are pros of:

A. A single-family home
B. A duplex
C. An apartment
D. Mixed use

A

A single-family home.

Also considered pros if the home is well-maintained and it holds its resale value if the community is thriving.

27
Q

Most investors use____________ to buy more than one property.

A. Leverage
B. Cash
C. Their own money
D. Equity

A

A. Leverage

28
Q

When your rental income is less than the mortgage and expenses related to operating the
property, it is called:

A. Positive leverage
B. Positive cash flow
C. Deferred
D. Negative leverage

A

D. Negative leverage

29
Q

The sum of all positive cash flows from rents and other sources of ordinary income generated by
a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and
other items of that nature is:

A. Net Operating Income (NOI)
B. Tax Shelter Offset
C. Equity
D. Profit

A

A. Net Operating Income (NOI).

It is legal to
shelter income and defer capital gains to minimize taxation and
maximize the money the investor keeps on an after-tax basis. The
concept of depreciation (also known as cost recovery) operates on the
assumption that physical assets lose an equal amount of value each
year due to wear and tear. Another term for this is “non-cash expense.”
There is no cash out of the investor’s pocket; however, it is treated like
an expense and is deductible.

122 Principles of Real Estate II (14 decks)

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