General - Chapter 10 Lesson 4

Question 1

Accounting (fiduciary duty) means…

Answer 1

keeping accurate records of financial transactions and preparing reports based on those records

Question 2

Cash-basis method

Answer 2

income is recorded when it’s received. Expenses are recorded when they’re paid

Question 3

Accrual-basis method

Answer 3

income is recorded when it’s earned. Expenses are recorded when they’re incurred

Question 4

Modified cash-basis method

Answer 4

income is recorded when it’s received. Expenses are recorded periodically as they accrue (with one-twelfth of the annual premium recorded each month for a non-monthly expense such as property taxes or an annual insurance premium)

Question 5

Two sources of income for a typical investment property

Answer 5

rental payments and miscellaneous fees (parking, tenant storage units, coin-operated laundry rooms, vending machines and ATMS)

Question 6

Add income together for

Answer 6

gross income

Question 7

operating expenses include

Answer 7

all costs of operating, maintaining, and managing a property

Question 8

Operating expenses do not inclue

Answer 8

debt services on loans, income taxes paid by the owner, or capital expenditures

Question 9

Operating expense ration (OER)

Answer 9

percentage of gross income consumed by operating expenses

Question 10

Operating expense ratio =

Answer 10

operating expenses/ gross income

Question 11

Fixed expenses

Answer 11

occur at regular intervals (property taxes and insurance premiums)

Question 12

variable expenses

Answer 12

can vary depending on occupancy or may be irregular (maintenance costs and utility charges)

Question 13

Net operating income (NOI)

Answer 13

is income after all expenses are deducted, one of the first indicators of the performance of an investment

Question 14

NOI =

Answer 14

gross income-operating expenses

Question 15

ROI =

Answer 15

NOI/Capital invested

Question 16

value =

Answer 16

NOI/ capitalization rate

Question 17

capitalization rate

Answer 17

the rate of return considered to be a reasonable return on investment, given the risk

Question 18

The increase NOI

Answer 18

increase gross income and decrease expenses

Question 19

cash flow

Answer 19

money generated by a property after all expenses have been paid

Question 20

Cash flow =

Answer 20

NOI - debt service

Question 21

Cash-on-cash return

Answer 21

ratio of income generated by the cash investment

Question 22

Cash-on-cash return =

Answer 22

cash flow/acquisition costs

Question 23

Budget describes the…

Answer 23

property’s expected income and operating expenses for each month

Question 24

first step in creating an operating budget is to…

Answer 24

estimate the potential gross income