Ch 15

Question 1

The three phases of building a home are:

A. land acquisition, development, and construction
B. financing, building, and resale
C. subdivision planning, building, and brokerage
D. design, construction, and occupancy

Answer 1

A. land acquisition, development, and construction

Question 2

___ add value to a property, such as tennis courts, a swimming pool, or an exercise room, are called amenities.

Answer 2

Ammenities

Question 3

___ is an increase in value, usually due to economic conditions.

Answer 3

Appreciation

Question 4

Tax advantages

Answer 4

Homeowners can take income tax deductions for their property taxes and the interest paid on their mortgage.

Question 5

T/F: As a general rule, owner-occupied homes are better maintained and more likely to appreciate in value than rental homes.

Answer 5

True

Question 6

T/F: Property values in a neighborhood are strengthened if there is a reasonable degree of conformity among the properties there.

Answer 6

True

While the homes shouldn’t be identical, they should be generally the same age, style, size, and quality.

Private restrictions and zoning, if enforced, promote this type of beneficial conformity.

Question 7

T/F: An odd-shaped lot is ordinarily more useful than an rectangular lot

Answer 7

False

A rectangular lot is ordinarily more useful than an odd-shaped lot

Question 8

It’s helpful to use a checklist of design deficiencies when looking over a floor plan. All of these features could be considered design flaws. Some of the problems are trivial, but they can add up to real inconvenience

Example of flaws:

Answer 8

• There’s no closet in the front hall.
• The back door isn’t easily accessible from the kitchen, or from the driveway or garage.
• There’s no eating area in or near the kitchen.
• The stairs lead up from a room, rather than a hallway or foyer.
• The bedrooms or bathrooms are visible from the living room or front hall.
• The family room is not visible from the kitchen.
• There’s no outside door leading into the basement.
• Bedrooms aren’t separated from each other by a bathroom or closet (for soundproofing).
• The deck, patio, or other outdoor living area is not accessible from the kitchen.

Question 9

Neighborhood considerations:

Answer 9

In choosing a home, a buyer should consider the neighborhood as carefully as the property itself.

Considerations include the owner-occupancy rate; conformity and use restrictions; changing uses; streets; schools; utilities; and public and social services.

Question 10

___ is essentially a fee paid to the investor by a borrower for the use of the investor’s money.

Answer 10

Interest

Question 11

___ are a share of the earnings of a business enterprise (such as a corporation).

They are paid to an investor who has contributed capital to the enterprise.

Answer 11

Dividends

Question 12

___ is an increase in the value of an asset, either due to inflation, or due to rising demand for that asset.

Answer 12

Appreciation

Question 13

A(n) ___ investment (also called an equity) is one in which the investor takes an ownership interest in an asset.

Answer 13

Ownership

Question 14

T/F: Real estate and stocks are both ownership investments.

Answer 14

True

Question 15

T/F: The return on an ownership investment usually takes the form of dividends or appreciation, or both.

Answer 15

True

Question 16

With a __ investment, the investor loans money to a person or an entity.
The borrower agrees to repay the money at a certain time (the maturity date), plus interest at a certain rate. The interest is the investor’s return on the investment.

Answer 16

debt

Question 17

Government bonds are an example of a ___ investment.

Answer 17

Debt

Question 18

From a lender’s point of view, a mortgage loan is a __ investment.

Answer 18

Debt

Question 19

In portfolio risk management, which of the following needs to be considered?

A.Reserves

B.Liquidity

C.Diversification

D.All of the above

Answer 19

D.All of the above

To minimize risk, an investor wants her investments to be diversified and as liquid as possible. She should also maintain some cash reserves.

Question 20

T/F: real eatate is considered liquid

Answer 20

False

Question 21

T/F: To get a higher yield, an investor usually has to accept less liquidity or greater risk, or both.

Answer 21

True

Question 22

Equity __ = financing a purchase with the buyer’s own money, rather than with borrowed funds.

Answer 22

Financing

Equity financing refers to purchasing property using the buyer’s own money, as opposed to money borrowed from a lender. (This is different from an equity loan, which refers to money that a property owner borrows using her equity as collateral.)

Question 23

Equity ___ = money that a property owner borrows using her equity as collatera

Answer 23

loan

Question 24

__= using borrowed money to invest in an asset.

Answer 24

Leverage

When the asset appreciates, the investor earns money on the borrowed funds as well as on his own funds that are invested in the asset.

If the earnings on the borrowed funds exceed the amount of interest the investor has to pay on the borrowed funds, the investor profits.

Question 25

In real estate, equity is defined as:
Select your answer below:

A.the difference between the property’s market value and the outstanding liens against it

B.the initial downpayment on the property
Incorrect
C.the difference between the loan amount and the property value
D.All of the above

Answer 25

D.All of the above

Question 26

___ = spendable income left over after the property’s operating expenses, mortgage payments, and taxes have been paid.

Answer 26

Cash flow

Question 27

An investor wishing to apply the principle of leverage should invest using:
Select your answer below:

A. as much of his personal funds as possible
B. a mix of personal and borrowed funds
C. borrowed funds as much as possible
D. funds borrowed only from family and friends

Answer 27

C. borrowed funds as much as possible

An investor applying the principle of leverage would use as much borrowed money as possible and as little of his own money as possible.

Question 28

“___” refers to the annual cash flow divided by the initial investment.

Answer 28

Cash on cash

Question 29

A store owner sells his property in a sale-leaseback transaction. For income tax purposes, he may:
Select your answer below:

A.continue to depreciate the improvements

B.retain fee simple title to the property
C.deduct future rent payments in full

D.All of the above

Answer 29

C.deduct future rent payments in full

In a sale-leaseback, a property owner sells the property to an investor, then leases it back from the investor (the new owner) and continues to occupy it. After entering into his sale-leaseback arrangement, the store keeper no longer owns the property and therefore will no longer be entitled to take depreciation deductions. As a business tenant, however, he will now be able to deduct the rent he pays to the investor/owner.

Question 30

real estate investment syndicate

Answer 30

The syndicate sells shares to investors and then uses that money to buy and develop property.

The syndicate may be organized as a partnership, a corporation, a trust, or a limited liability company. A syndicate with 100 or more investors may qualify as a real estate investment trust and receive tax benefits.

Question 31

___ are investment instruments that use pools of home mortgages as collateral.

They are typically issued by Fannie Mae, Freddie Mac, or private entities, and can be bought and sold like stocks and bonds.

Answer 31

Mortgage-backed securities

Question 32

John owns an apartment building and does not live on-site. He is therefore required to have a resident manager or responsible person on the premises. The requirement exists because his building contains:
Select your answer below:

A.more than 2 units

B.more than 8 units

C.16 or more units

D.20 or more units

Answer 32

C. 16 or more units