Chapter 12: Real Estate Investment and Opportunity Brokerage

Question 1

Appreciation

Answer 1

An increase in a property’s value

Question 2

Basis

Answer 2

The purchase price plus closing costs and other added improvements

Question 3

Capital Gain

Answer 3

The positive difference between the sales price and the basis of the property, after appropriate adjustments for fix-up expenses, closing costs, allowable depreciation, etc., is capital gain (taxable profit)

Question 4

Cash Flow

Answer 4

The resulting amount when annual debt service, tax liability and capital improvement costs are subtracted from net operating income

Question 5

Equity

Answer 5

The difference between the market value of a property and the mortgage debt

Question 6

Going Concern Value

Answer 6

The value of a business considered as an operating enterprise, as opposed to its value merely as a collection of assets and liabilities

Question 7

Goodwill

Answer 7

An intangible asset (value) of a business based on its reputation or expectation of customer loyalty

Question 8

Leverage

Answer 8

The use of borrowed funds to finance the purchase of an asset

Question 9

Liquidation Analysis

Answer 9

Comparing the value of assets to liabilities, the difference typically representing minimum value

Question 10

Liquidity

Answer 10

The ability to convert assets to cash or its equivalent within a reasonable period of time

Question 11

Personal Property

Answer 11

All property that is not real property; also known as a chattel

Question 12

Tax Shelter

Answer 12

An investment that shields income or gain from payment of income taxes; a term used to describe some tax advantages of owning real property (or other investments), including postponement or even elimination of certain taxes

Question 13

Tom owns his home which has a value of $200,000 with a mortgage of $140,000. What is the value of Tom’s equity?

Answer 13

$60,000

Question 14

Leverage increases an investor’s buying power but it:

Answer 14

Decreases yield

Question 15

All of the following are disadvantages of investing in real estate except:

    A     Need for expert help
B	Risk
C	Need for management
D	Leverage

Answer 15

D Leverage

Question 16

The risk that income earned may be lower than projected and actual operating expenses may be higher than expected is known as:

Answer 16

Business risk

Question 17

If a business is operating at the time of its sale, its added value as an ongoing enterprise is known as its:

Answer 17

Going concern value

Question 18

Johnny decided to finance the purchase of his second home by giving a mortgage to his local bank. This method of acquiring an asset is known as:

Answer 18

Leverage

Question 19

What investment offers the greatest yield after taxes to an investor in the 38% tax bracket?

    A     16% before taxes
B	13% before taxes
C	10% after taxes
D	9% after taxes

Answer 19

A 10% after taxes

Question 20

An intangible asset (value) of a business based on its reputation or expectation of customer loyalty is known as:

Answer 20

Goodwill

Question 21

All of the following are advantages of investing in real estate except:

    A     Illiquidity
B	Good rate of return
C	Tax advantages
D	Leverage

Answer 21

A Illiquidity

Question 22

Which of the following is not an accepted approach to valuing a business:

    A     Sales comparison approach
B	Income capitalization approach
C	Cost-depreciation approach
D	Goodwill value approach

Answer 22

D Goodwill value approach