Chapter 17

Question 1

Appreciation is

Answer 1

how much a property grows (or declines) in value in the market year to year

Question 2

Adjusted basis

Answer 2

the original cost basis of a property reduced by certain deductions and increased by certain improvement costs

Question 3

Cash Flow

Answer 3

the amount of spendable income after the expenses from operating and interest are deducted from the gross income. Cash flow can be either positive or negative

Question 4

Capitalization rate

Answer 4

the percent of return for an investor on his money on an investment property

Question 5

Capitalization

Answer 5

is the method of determining a property’s value by considering the net annual income and the capitalization rate that the investor wants as a return

Question 6

Capital Gain

Answer 6

is an income tax term for the taxable profit made from the sale of the property or any capital asset

Question 7

Equity

Answer 7

is the amount of value or interest that an owner has in the property over and above the loans on the property

Question 8

Leverage

Answer 8

is the use of other people’s money (borrowed) to spread the risk of investment

Question 9

Liquidity

Answer 9

is how fast the property can be sold. Real estate is less liquid than stocks or bonds

Question 10

Risk

Answer 10

is chance of loss for an investor

Question 11

Tax Shelter

Answer 11

is an income tax term meaning an investment which will shield or reduce other money from income tax

Question 12

Types of Investments

Answer 12

Residential
Commercial
Industrial
Agricultural properties

Question 13

Advantages of Real Estate investments

Answer 13

1. Good rate of return
2. Tax advantages
3. Hedge against inflation
4. Leverage
5. Equity build up

Question 14

Disadvantage of Real Estate investments

Answer 14

1. Illiquid - properties are not easy to sell
2. Market is local in nature
3. Need for expert help
4. Management effort
5. Risk is always involved.

Question 15

Real Estate Investment Trust

Answer 15

1. Can be purchased through stock brokers just as mutual funds
2. Does not have to pay corporate income tax so long as 95% of its income is distributed to its shareholders and each trust must have a group of 100 or more members to hold shares

Question 16

Income capitalization approach

Answer 16

1. Process to determine the property’s value
2. Cap rate measures the amount of risk
3. The higher the cap rate, the greater the risk

Question 17

Steps to take for the capitalization approach

Answer 17

1. Estimate annual potential gross income.
2. Subtract an appropriate allowance for vacancy and collection losses to arrive at an effective gross income.
3. Deduct operating expenses. (These do NOT include debt service or mortgage payments). This gives you Net Operating Income. NOI is Net Operating Income.
   Divide the capitalization rate to the net operating income to determine market value.

Question 18

Business brokerage expertise required:

Answer 18

1. Knowledge of corporate financing
2. Knowledge of bookkeeping and accounting
3. Valuation of the business
4. Knowledge of laws involved

Question 19

Steps in the sale of a business

Answer 19

The broker lists the business for sale.

All the assets and liabilities are noted that belong to the business.

Value for the business is established, using some or all of the methods of appraisal.

Subtract the liabilities short and long term from the value of the business.

Check to see if the business is a corporation. If it is, divide the value by the outstanding shares.
Market the business.

Find a buyer and obtain a purchase agreement.

Question 20

Steps in the sale of a business

Answer 20

The broker lists the business for sale.

All the assets and liabilities are noted that belong to the business.

Value for the business is established, using some or all of the methods of appraisal.

Subtract the liabilities short and long term from the value of the business.

Check to see if the business is a corporation. If it is, divide the value by the outstanding shares.
Market the business.

Find a buyer and obtain a purchase agreement.

Question 21

What does the term NOI MOST mean?

Answer 21

It is the amount of money left after the vacancy rate and operating expenses are deducted

Question 22

When an investor was analyzing the risks in a property, he was considering an 8% return on his investment compared to a 10% return. In terms of the purchase price, what will happen?

Answer 22

The higher the risk, the lower the purchase price