Chapter 2 Real Estate as an Investment Alternative

Question 1

How are tangible investments classified?

Answer 1

They are classified into two general types: those that produce an income stream during the holding period and those that do not.

Question 2

What does the term metes and bounds refer to?

Answer 2

A method of describing real estate that measures distance and direction from an arbitrary reference point.

Question 3

What is tenancy in common?

Answer 3

A tenancy that provides for fractional ownership by two or more individuals. Each tenant hold the title individually, and the ownership fractions need not be equal in amount.

Question 4

What are the two categories of real estate investment trusts?

Answer 4

Equity Trusts-created for real estate ownership.

Mortgage Trusts-organized to provide real estate financing of virtually all types, including long-term mortgage.

Question 5

The number of shareholders is restricted on which type of ownership.

Answer 5

Subchapter S

Question 6

Land sale transactions are classified as what form of data?

Answer 6

Market data. (Other types are income data, expense data, physical data, cost data, financing data, and regulatory and misc. data)

Question 7

In business, what defines risk?

Answer 7

The potential for injury or loss.

Question 8

Free transferability of interest is an advantage of:

a. corporate ownership
b. partnership ownership
c. limited partnership ownership
d. joint venture ownership

Answer 8

a. corporate ownership

Question 9

Define Syndication.

Answer 9

An ownership form in which an individual, called a syndicator, identifies or creates an investment opportunity and attracts investors to provide equity for the project.

Question 10

An organizational form of ownership that issues shares of beneficial interest is a:

a. corporation
b. Subchapter S corporation
c. Real Estate Investment Trust
d. Syndication

Answer 10

c. Real Estate Investment Trust

Question 11

List the six basic types of data necessary for accurate real estate evaluation.

Answer 11

• Income and expense
• Market
• Physical
• Cost
• Financing
• Regulatory and Misc.

Question 12

How is joint tenancy different from tenancy in common?

Answer 12

In joint tenancy, in the event that one of the joint tenants dies, title passed to the survivor rather than to an heir.

Question 13

Define business cycle.

Answer 13

Alternating periods of expansion and decline in economic activity.

Question 14

Why are land descriptions and demarcations lines especially important?

Answer 14

They describe the property and make it distinct from other parcels.

Question 15

When a commercial bank has to borrow from a district Federal Reserve Bank, it is a process known as what?

Answer 15

Discount window operations.

Question 16

What is the main advantage of a partnership?

Answer 16

Partnerships have greater borrowing power than individuals.
Two or more parties share the financial impact of failure so the risk is spread.
Two or more individuals share time requirements so that duties and responsibilities can be assigned among partners.
Knowledge and expertise increase with several individuals participating in ownership of the firm.

Question 17

What are the characteristics of a limited partnership?

Answer 17

There are two classes of partners who have unequal ownership interests and differing responsibilities. General partners are responsible for the operation of the firm and are liable for the financial obligations of the partnership.

Question 18

What is one advantage of a trust.

Answer 18

Assets placed in trust cannot be seized by creditors for payment of debts.

Question 19

When the Federal Reserve buys securities and lowers the discount rate, what happens to interest rates?

Answer 19

When securities are purchased for cash from the market makers, it results in an increased amount of cash available for loans. The more cash that is available for lending the lower interest rates will tend to become.

Question 20

A trust is a form or ownership by which a trustee holds assets for a :

a. holder
b. trustor
c. beneficiary
d. stockholder

Answer 20

c. beneficiary

Question 21

What is a general warranty deed?

Answer 21

A deed is a written instrument that is signed by the owner of a property in order to convey the real property to another person. A general warranty deed contains covenants that guarantee that the seller will make good any defects in the title that he or she transfers through the entire title chain of the property.

Question 22

What are the general forms of physical data?

Answer 22

• architectural plans
• as-built drawings
• assessment of property condition
• construction cost data
• electrical plans
• foundation plans
• mechanical plans
• -observed obsolescence
• observed physical condition
• project specifications
• renovation costs
• site and sold surveys
• structural plans

Question 23

The burden of documentation for a transfer of title to a property is placed on the:

a. buyer and seller
b. buyer alone
c. seller alone
d. broker

Answer 23

a. buyer and seller

Question 24

Observed physical obsolescence is classified as a form of:

a. market data
b. physical data
c. financing data
d. regulatory data

Answer 24

b. physical data

Question 25

What are some disadvantages of the corporate ownership cycle?

Answer 25

Double taxation-corporate profits are taxed and then taxes are paid on the dividends paid to shareholders. Limitations on capital accumulation-IRS will not allow some smaller corporations to accumulate excess capital beyond a certain level. Extensive Administrative Paperwork

Question 26

Which type of corporate ownership can only issue common stock?

Answer 26

Subchapter S Corporations - only individuals residing in the US can be stockholders - only common stock can be issued - only corporations created within and domestic to the US are eligible - There can be no more than 75 stockholders - Other corporations, partnerships, and most trusts cannot own sub-chapter S corporate shares.

Question 27

What is the difference between public (composite) data and private (specific) data?

Answer 27

Public data can be found from public sources. Private data is regarded as private by the individuals who hold it. Private sources often require confidentiality and cannot be verified.

Question 28

One general category of REITs is: a. Equity Trusts b. Leverage Trusts' c. Limited Trusts d. Joint Ventures

Answer 28

a. Equity Trusts

Question 29

Subchapter S corporations are primarily established to eliminate: a. the disadvantages of of proprietorships. b. double taxation of income c. ERISA requirements on contributions d. transferability of interests

Answer 29

b. double taxation of income

Question 30

A form of ownership available only to married couples is: a. joint tenancy b. tenancy in common c. tenancy by the entirety d. condominium interest

Answer 30

c. tenancy by the entirety

Question 31

Bank deposits placed with the Fed to aid bank liquidity are termed: a. savings accounts b. treasury notes c. demand deposits d. reserves

Answer 31

d. reserves

Question 32

Define tenancies in real estate.

Answer 32

Real estate multiple ownership form that typically occurs among family members.

Question 33

When the Federal Reserve sells securities and raises the discount rate, what happens to interest rates?

Answer 33

When securities are sold to the market makers, cash is withdrawn from the pool of funds available for lending and interest rates rise.

Question 34

When a security is deemed to have a higher level of risk than normal, it should produce a: a. fluctuating yield. b. more stable yield c. higher yield d. lower yield

Answer 34

c. higher yield

Question 35

List the four principle methods of describing and demarcating real estate.

Answer 35

US Rectangular Survey System Lot and Block System Metes and Bounds System Geodetic Survey System

Question 36

List the advantages and disadvantages of corporate ownership.

Answer 36

Advantages - limited financial liability - sound management - company stability - shareholder flexibility - more financial options Disadvantages - double taxation - limitations on capital accumulation - extensive administrative paperwork

Question 37

Define yield.

Answer 37

The total return on an investment during the period on which it is held.

Question 38

What is meant by liquidity?

Answer 38

An entity's cash position, based on assets that can be readily converted into cash.

Question 39

Which form of tenancy is available only to married couples?

Answer 39

Community Property

Question 40

What for of trust must pay out 95% of its income to keep it favorable tax status?

Answer 40

Real Estate Investment Trusts (REITs).