Chapter 13: Basic Real Estate Investment

Question 1

after-tax cash flow

Answer 1

Money left after income taxes have been paid.
The amount of cash remaining after the owner has reported all income from the property less appropriate tax deductions and any taxes due.

Question 2

anticipated revenue

Answer 2

A synonym for potential or projected or scheduled gross income used when developing an operating statement

Question 3

appreciation

Answer 3

opposite of depreciation;
An increase in the worth or value of a property due to economic or related causes, which may prove to be either temporary or permanent

Question 4

before-tax cash flow

Answer 4

The money left after debt service has been subtracted from the net operating income and before income tax is paid; also called cash throwoff or cash flow after debt service

Question 5

cash flow

Answer 5

The net spendable income from an investment, determined by deducting all operating and fixed expenses from the gross income. When expenses exceed income, a negative cash flow results

Question 6

cash-on-cash rate of return

Answer 6

Derived by dividing the before-tax cash flow by the owner’s cash investment; equity dividend rate

Question 7

cash throwoff

Answer 7

The money left after debt service has been subtracted from the net operating income and before income tax is paid; also called before-tax cash flow or cash flow after debt service

Question 8

corporation

Answer 8

An entity or organization, created by operation of law, whose rights of doing business are essentially the same as those of an individual. Can own and sell real estate in its own name. Ownership in the corporation is achieved through the purchase of stock certificates. The entity has continuous existence until it is dissolved according to legal procedures.

Question 9

effective gross income (EGI)

Answer 9

The anticipated income from a rental property resulting from potential gross income minus an allowance for vacancy and bad debts

Question 10

equity buildup

Answer 10

That portion of the loan payment directed toward the principal rather than the interest, plus any gain in the property value due to appreciation

Question 11

equity dividend rate

Answer 11

Derived by dividing the before-tax cash flow by the owner’s cash investment; cash-on-cash rate of return

Question 12

general partnership

Answer 12

A typical form of joint venture in which each general partner shares in the administration, profits, and losses of the operation

Question 13

inflation

Answer 13

The gradual reduction of the purchasing power of the dollar, usually related directly to the increases in the money supply by the federal government

Question 14

leverage

Answer 14

The use of borrowed money to finance any investment

Question 15

limited liability company (LLC)

Answer 15

A hybrid business entity with combined characteristics and benefits of a limited partnership and an S corporation

Question 16

limited partnership

Answer 16

A business arrangement whereby the operation is administered by one or more general partners and funded, by and large, by limited or silent partners, who are by law responsible for losses only to the extent of their investments

Question 17

liquidity

Answer 17

The ability to sell an asset and convert it into cash, at a price close to its true value, in a short period of time

Question 18

operating statement

Answer 18

A detailed statement prepared on a periodic basis showing the financial picture of a business through the revenues and expenses; profit and loss statement.

Question 19

partnerships

Answer 19

An association of two or more individuals who carry on a continuing business for profit as co-owners. Under the law, a partnership is regarded as a group of individuals rather than a single entity.

Question 20

projected or potential gross income (PGI)

Answer 20

The amount of rental income the property could produce with 100% occupancy and with all tenants paying full rent; also called scheduled gross income

Question 21

real estate investment

Answer 21

n

Question 22

real estate investment trust (REIT)

Answer 22

Trust ownership of real estate by a group of individuals who purchase certificates of ownership in the trust, which in turn invests the money in real property and distributes the profits back to the investors free of corporate income tax

Question 23

reserves for replacement

Answer 23

An amount of money budgeted for replacements of short-lived components of an investment property, such as appliances

Question 24

return on investment (ROI)

Answer 24

An annual percentage derived from dividing cash invested into net after-tax income

Question 25

scheduled gross income (SGI)

Answer 25

The amount of rental income the property could produce with 100% occupancy and with all tenants paying full rent; also called potential gross income

Question 26

syndicate

Answer 26

A combination of people or firms formed to accomplish a business venture of mutual interest by pooling resources. In a real estate investment syndicate, the parties own and/or develop property, with the main profit generally arising from the sale of the property