Investments

Question 1

What characteristic would make real estate a riskier investment than government securities?

Answer 1

Environmental Risk

Question 2

What do we call the idea that money available now is worth more than the same amount in the future, due to its potential earning capacity?

Answer 2

Time value of money

Question 3

What is debt to equity ratio?

Answer 3

Loan to value ratio

(The ratio between borrowed funds (loan/debt) and the current value of the property)

Question 4

How is financial leverage created?

Answer 4

By adding borrowed funds (debt) with equity

Question 5

Interest, depreciation, repairs, long-distance travel, casualty, theft losses, and insurance are all examples of what?

Answer 5

Tax deductions for owners of rental property

Question 6

What is debt service?

Answer 6

The principal and interest payments made on a debt over a period of time.

Question 7

List four types of tax deductions available to owners of rental property that are not available to ordinary income.

Answer 7

• Depreciation
• Repairs
• Legal + Professional Services
• Employees + Independent Contractors

Question 8

What is the section of the Internal Revenue Code that allows investors to sell rental property and buy replacement property without paying any capital gains tax?

Answer 8

1031 Exchange

Question 9

Syndicates intending to make a profit for many people from the efforts of a few, must comply with the rules and regulations of whom?

Answer 9

Securities and Exchange Commission

Question 10

What business forms can syndication take (4)?

Answer 10

• Limited Partnership
• General Partnership
• Corporation
• Real Estate Investment Trust (REIT)

Question 11

A joint venture is set up for a limited purpose. Because of this, it makes it different than a general partnership due to what?

Answer 11

The implied authority of the members is more limited.

Question 12

In a limited partnership, what is the liability difference between a general partner and a limited partner?

Answer 12

• Limited partners are liable only to the extent of their investment.
• General partners have unlimited liability.

Question 13

When examining Real Estate Mortgage Investment Conduits (REMICs), paying a defined principal payment schedule at a single, constant prepayment speed refers to:

Answer 13

Target Amortization Classes

Question 14

What does REMIC stand for?

Answer 14

Real Estate Mortgage Investment Conduits

Question 15

Investors in Accrual Classes receive what?

Answer 15

No cash flow from the security until certain other classes are paid off.

Question 16

What do Real Estate Investment Trusts allow smaller investors to do?

Answer 16

Pool their resources for quality investments with limited liability

Question 17

What is the difference between an equity trust and a mortgage trust?

Answer 17

• Equity trusts buy and sell real property.
• Mortgage trusts buy and sell mortgage loans.

Question 18

What type of trust gains profit from rental income, capital gains, mortgage interest, and placement fees?

Answer 18

Hybrid Trust

Question 19

“Risk” in real estate investing:

Answer 19

Risk is the chance of experiencing a loss

Question 20

Liquidity

Answer 20

Assets ability to be easily converted into cash through buying or selling without causing a significant movement in the price or losing value.

(Cash is the most liquid asset)

Question 21

Illiquid

Answer 21

An asset that cannot be sold or converted into cash easily.

Question 22

Leverage

Answer 22

Using a loan to finance the purchase of real estate or other assets.

*The higher the ratio of borrowed funds to equity, the greater the degree of leverage.

Question 23

General Partnership

Answer 23

Active partner in the partnership with unlimited personal liability for the debts of the partnership.

Question 24

Limited Partnership

Answer 24

Partnerships in which the partners have limited personal liability as opposed to the unlimited liability of a general partnership.

Question 25

Corporations (Corps)

Answer 25

A legal entity that is separate and distinct from its owners.

Shareholders of a corporation have limited liability and do not participate directly in managing the corporation.

Question 26

Limited Liability Companies (LLC)

Answer 26

Corporate structures that give its owners protection from personal liability without the regulations associated with corporations.

LLCs have operating agreements that are similar to corporate bylaws but do not have permanent existence.

Question 27

Real Estate Mortgage Investment Conduit (REMIC)

Answer 27

Special tax vehicle for entities to pool mortgages and offer multiple classes of pass-through securities to investors.