General - Chapter 10 Lesson 2

Question 1

Primary goal of any investor is…

Answer 1

the preservation of the capital invested and earn a reasonable profit

Question 2

Income Stream

Answer 2

how: rent goal: maximizing cash flow

Question 3

Return on Investment

Answer 3

how: amount received when property is sold goal: maximizing return

Question 4

Equity Gain

Answer 4

How: reduction in owner’s encumbered interest Goal: increasing equity

Question 5

Leverage

Answer 5

How: using other people’s money Goal: obtaining assets with relatively little of one’s own money

Question 6

Tax Shelter

Answer 6

How: deductions for property taxes, mortgage interest, and depreciation Goal: minimizing tax burden

Question 7

Hedge Against Inflation

Answer 7

How: property value rises higher than inflation rate Goal: keeping investment gains ahead of inflation

Question 8

Risk is…

Answer 8

the possibility of losing either the principal invested and/or the potential income from the investment

Question 9

Liquidity is…

Answer 9

the ability to convert an asset into cash quickly without the loss of principal

Question 10

Equity is…

Answer 10

the difference between the value of real property and the total amount of any liens against it

Question 11

When purchasing real property, the _____ ________ is usually the only equity a property owner has right away

Answer 11

down payment

Question 12

Equity=

Answer 12

property value-current balance of loan

Question 13

Equity also increases as the value of the property…

Answer 13

appreciates

Question 14

Leverage is…

Answer 14

the use of borrowed funds with the goal of increasing return on investment

Question 15

Leverage may…

Answer 15

increase or decrease an investor’s return that would have been received had they purchased the property on an all-cash basis

Question 16

Leverage also called

Answer 16

other people’s money (OPM)

Question 17

Return on investment=

Answer 17

net profit/investment

Question 18

Appreciation

Answer 18

as the value of the property goes up

Question 19

Equity

Answer 19

buildup as the mortgage loan balance is reduced

Question 20

leverage

Answer 20

as they use other people’s money to finance their investments

Question 21

tax shelter is…

Answer 21

a property or another investment that gives the owner certain income tax advantages when deductions exceed the cash flow

Question 22

Operating statment

Answer 22

first step to analyzing real estate investment, shows both income and expense items associated with operating the property

Question 23

Forward looking

Answer 23

pro forma statement

Question 24

ultimate goal of an operating statement is to find…

Answer 24

the cash flow

Question 25

Net operating income is...

Answer 25

one of the first indicators of an investment's performance and is the first calculation in the cash flow model

Question 26

NOI is calculated by...

Answer 26

deducting operating expenses from effective gross income

Question 27

NOI does not take into consideration

Answer 27

any expenses associated with the financing of property or debt service

Question 28

NOI - Potential Gross Income

Answer 28

total income received from an investment or business before any expenses are paid or losses are accounted for

Question 29

NOI - Vacancy and Collection Losses

Answer 29

some are expected because enough property is always 100% occupied, tenants can fail to pay rent

Question 30

NOI - Miscellaneous Income

Answer 30

money earned other than rent and rent-related items should be added

Question 31

NOI - Effective Gross Income

Answer 31

estimated rental income the owner anticipates collecting and that will eb available to pay expenses

Question 32

NOI - Expenses

Answer 32

may be fixed or variable

Question 33

Capitalization rate

Answer 33

indicates rate of return

Question 34

Cap rate variables

Answer 34

income, rate, value

Question 35

Income=

Answer 35

Value*Cap Rate

Question 36

Cash Flow is...

Answer 36

a measurement of both income and expense items associated with operating a property

Question 37

cash-on-cash return

Answer 37

ratio of income generated by a property to the cash investment in the property

Question 38

cash-on-cash return=

Answer 38

before tax cash flow/acquisition costs

Question 39

Percentage of Profit=

Answer 39

what you made/what you paid

Question 40

Percentage of loss=

Answer 40

what you lost/what it cost