Chapter 17

Question 1

Appreciation

Answer 1

refers to a growth in value in the market over time. It is usually expressed as a percentage.

Question 2

Adjusted Basis

Answer 2

is the original cost basis of a property reduced by certain deductions and increased by certain improvements. The original basis determined at the time of acquisition is reduced by the amount of allowable depreciation or depletion allowances taken by the taxpayer, and by the amount of any uncompensated property losses suffered by the taxpayer. It is then increased by the cost of capital improvements plus certain carrying costs and assessments. The amount of gain or loss recognized by the taxpayer upon sale of the property is determined by subtracting the adjusted basis on the date of the sale from the adjusted sales price.

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

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 generated from the sale of the property or any capital asset

Question 7

Equity

Answer 7

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

Question 8

Leverage

Answer 8

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

Question 9

Liquidity

Answer 9

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

Question 10

Risk

Answer 10

chance of loss for an investor.

Question 11

Tax Shelter

Answer 11

an income tax term meaning an investment that will shield or reduce income tax.

Question 12

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?

• The higher the risk, the lower the purchase price.
• The lower the risk, the lower the purchase price.
• The purchase price would be the same either way.
• The higher the risk, the higher the purchase price.

Answer 12

The higher the risk, the lower the purchase price.

Question 13

Accrual accounting is where

• cash is counted as it comes in and goes out.
• future income and future debts are shown as they are received and invoiced.
• debts are allowed to remain unpaid.
• income is measured as it is collected.

Answer 13

future income and future debts are shown as they are received and invoiced.

Question 14

What is an income tax term meaning an investment that will reduce or shield other money from income tax?

• Appreciation
• Capitalization
• Adjusted basis
• Tax shelter

Answer 14

Tax shelter

Question 15

Which is NOT an advantage of investing in real estate?

• Good rate of return
• Hedge against inflation
• Equity buildup
• Lack of liquidity

Answer 15

Lack of liquidity

Question 16

An example of an “intangible” asset for a business would be

• ovens and dishes used for the business.
• the number of tables filled every day.
• how many workers the business needs.
• the reputation or goodwill of the business.

Answer 16

the reputation or goodwill of the business.

Question 17

An investor was looking at a sixteen-unit apartment building. Four of the units rented for $600, four for $750, four for $725, and four for $800 per month. The building had monthly expenses of $1200. If the investor wants an 8% rate of return, how much should he pay for the building?

• $750,000
• $1,000,000
• $1,545,000
• $1,725,000

Answer 17

$1,545,000

Add up monthly income, subtract monthly expenses, multiply by 12 to get annual income, divide that number by .08

Question 18

When a business has been in operation for a long time, what type of value does it have?

• Market value
• Going concern value
• Tax value
• Capital value

Answer 18

Going concern value

Question 19

11When an investor uses borrowed money to purchase a piece of investment property he is taking advantage of

• leverage.
• capital gain.
• depreciation.
• basis.

Answer 19

leverage

Question 20

The percentage which expresses the amount of risk that an investor is willing to make is called the

• cap rate.
• NOI.
• loan to value ratio.
• discount rate.

Answer 20

cap rate

Question 21

The term “NOI” MOST NEARLY means

• the amount of money in annual income.
• the amount of money left after the vacancy rate is deducted.
• the amount of money left after the vacancy rate and operating expenses are deducted.
• the amount of money left after the vacancy rate, operating expenses, and mortgage payments are deducted.

Answer 21

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

NEVER include mortgage payment deduction

Question 22

In analyzing the value of a business, the method that is used to determine the value if the business were to bankrupt is called

• cost approach.
• income approach.
• comparable sales approach.
• liquidation approach.

Answer 22

liquidation approach