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Construction Basics > Chapter 20 > Flashcards

Chapter 20 Flashcards

1
Q

Pam’s building has 4 apartments with a market value of $500/ month. One apartment is vacant. The laundry machines make $1000/ year. What is the potential gross income?

A

$24,000

4 apts x $500 x 12 months
vacancy + laundry = irrelevant

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2
Q

What is the maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss?

A

Potential Gross Income

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3
Q

What is potential gross income?

A

The maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss

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4
Q

What is HO4?

A

Home Owner’s Insurance-> Renter’s Insurance

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5
Q

What does the Office of Receiver of Tax do?

A

Collect tax

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6
Q 
What is not necessary for a contract?
a- capacity
b- competence
c- agreement
d- written form
A

D. Written

Capacity refers to the legal age (18+); Competence refers to being of sound mind; An agreement is a contract.

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7
Q

Do contracts have to be written?

A

No

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8
Q 
What is the most liquid?
a- real estate
b- stocks
c- art
d- cars
A

B. Stocks (easily liquified)

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9
Q

What does OPM mean and what does it stand for?

A

Other People’s Money; Leverage

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10
Q

What is a document predicting future financial performance of a building?

A

Pro forma

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11
Q

What is pro forma?

A

A document predicting future financial performance of a building

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12
Q

What is a planning tool for buildings future performance?

A

Pro forma

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13
Q

What document would a buyer prepare to predict a build’s finances?

A

Pro form

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14
Q

What is:

Potential Gross Income
- Vacancy & collection loss
+ Other non-rental income (laundry, etc)?

A

Effective Gross Income

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15
Q

What is effective gross income?

A

Potential Gross Income - Vacancy & Collection Loss + Other non-rental Income

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16
Q

What is:

Effective Gross Income

  • Expenses:
    • Real Estate tax
    • Insurance
    • Payroll
    • Utilities
    • Reserve fund
    • Management fee
    • etc?
A

Net Operating Income

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17
Q

What is Net Operating Income?

A

Effective gross income - expenses (fixed & variable)

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18
Q

What does NOI stand for?

A

Net Operating Income

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19
Q

What is the difference between fixed and variable expenses in relation to the operating statement?

A

Fixed include things that do not change (real estate tax, insurance) vs variables, which do change (payroll, utilities, reserve fund, management fees, etc)

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20
Q

What is the Operating Statement?

A

A document which shows the Potential Gross Income, Vacancies & Collection Losses, Non-rentable Income -> Effective Gross Income, Fixed & Variable Expenses –> Net Operating Income

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21
Q

Sam’s building has $7500/ month income and $45,000/ year expenses. Pam will buy it if she can get 12% rate of return. How much should Pam pay?

A

$375,000

$7500 x 12 months= 90,000 Effective Gross Income

90,000 - 45,000 Expenses= $45,000 NOI

$45,000 / 12%= 375,000

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22
Q

A building sold for $600,000 at 12% rate of return. What was the income?

A

$72,000

$600,000 x 12%

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23
Q

What is IRV and what are the 3 methods to determine it?

A 
Interest = Rate x Value
Rate= Interest/ Value
Value= Interest/Rate
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24
Q

What are expenses that are the same regardless if the building is full or empty?

A

Fixed

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25
Q

What expenses depend on occupancy? For instance the water bill will change.

A

Variable

26
Q

What is the reserve fund?

A

Rainy day fund set aside by manager in the event of an emergency.
Usually 5% of effective gross income
Often required by a bank
If representing a buyer, buyer’s lawyer will prefer to see this to protect the client

27
Q

What is a fund set aside in the event of an emergency, often 5% of the effective gross income?

A

Reserve fund

28
Q

What is typically paid flat fee or percentage based off gross income and treated like an expense?

A

Manager fee

29
Q

What is the most important number for a building that people will often ask for over the price of the building?

A

NOI

30
Q

What is the potential gross income - vacancy & collection loss + other non-rental income?

A

effective gross income

31
Q

How is NOI determined?

A

Effective Gross Income - Expenses = NOI

32
Q

I/R=V stands for?

A

(Dollar amount of income) / (Rate of Return)= (Dollar amount of value)

33
Q

With IRV, what is factual and what is an opinion?

A

Income is a fact based upon tax returns

Rate of Return + Value are opinions

34
Q

What are the 3 documents to send to potential commercial investors?

A
  • Operating Statement
  • Rent Roll
  • Pro Forma
35
Q

When do you use IRV?

A

To determine the value of a building

36
Q

What is Capitalization Rate? (Cap Rate)

A

Rate of return investors are getting in a certain market for a certain product
(Market rate of return as a whole. Consider the example of someone’s sneakers- you know they are more than $2 but less $20,000)
Market -> Capitalization

37
Q

What is the rate of return investors are getting in a certain market for a certain product?

A 
Capitalization Rate (Cap Rate)
Market -> Cap Rate
38
Q

What are some good ways to develop market knowledge to help determine Cap Rate?

A
  • Real Deal, WSJ, 1010 wins

- Ask peers, broker students, etc.

39
Q

What is a factor not covered by NOI and why?

A

Mortgage Debt Service. It is personal and not universal.

40
Q

How do you determine “Before Tax Cash Flow”?

A

NOI - mortgage debt service= Before Tax Cash Flow

41
Q

How do you determine “Final Cash Flow Income”

A

Before Tax Cash Flow (NOI- mortgage debt service)= Final Cash Flow Income

42
Q

What are 2 factors that determine mortgage debt service?

A

principal and interest

43
Q

Sam wants to buy a building for $2,000,000. Income is $15,000/ month. Down payment is $500,000. If Sam buys it, what is his cash-on-cash return?

A

36%

$15,000 x 12 months= 180,000
$180,000/ $500,000 down payment= 36%

(2 mil irrelevant)

44
Q

How do you determine Cash-on-Cash return?

A

Income / Down Payment= Cash on Cash Return

45
Q

What is Income/ Down Payment?

A

Cash-on Cash Return

46
Q

Between interest and principal, which one goes up and which one goes down?

A 
Interest= down
Principal= up
47
Q

Mortgage balance is $150,000 at 6% interest. What is this month’s dollar amount of interest?

A

$750

($150,000 x 6%)/ 12 months= $750

48
Q

What is a decrease in value?

A

Depreciation

49
Q

What are the two types of Depreciation?

A

Economic

Tax

50
Q

What is “depreciation”?

A

A decrease in value

51
Q

What are the 3 reasons for Economic Depreciation?

A

Physical
Functional Obsolescence
External Obsolescence

52
Q

What is called when something works but doesn’t meet modern standards by being either old or inappropriate, and what is an example?

A

Functionally Obsolete/ Functional Obsolescence

Old elevators

53
Q

If the air-conditioner works but doesn’t meet modern tenant standards, what is it called?

A

Functionally Obsolete/ Functional Obsolescence

54
Q

What does it mean when something is inappropriately functionally obsolete?

A

It is not appropriate for the neighborhood (opened a palace in a poor neighborhood would cause the real estate to lose value - the property would be more valuable in the Hamptons)

55
Q

What is it called when something is inappropriate outside of the building?

A

External Obsolescence

56
Q

What is an example of a tax shelter?

A

Depreciation allowance

57
Q

How long does the government attribute a life span for both an apartment and a commercial property?

A

27.5 years; 39 years

58
Q

What is depreciation allowance an example of?

A

Tax Shelter

59
Q

What is the amount the landlord can annually deduct of the building’s value from the building’s income?

A

1/27.5th or 3.636%

60
Q

What are two things that cannot depreciate?

A

Land

Non-income real estate

61
Q

If a building’s value is 1 million dollars, what is the tax deduction, and does this deduction value change over time?

A

$36,360

No; if you bought it for $1 million value will always be $1 million regarding the tax deduction.

62
Q

A property is worth $200,000 of which $30,000 is land. It has 10 apartments renting for $580/ month. What is the annual depreciation deduction?

A

$6182.

$200,000- $30,000 land value= $170,000 for building
APT= 27.5 years

$170,000 / 27.5 = $6182
OR
3.636% x $170,000=$6182

Amount of apts & rent/month irrelevant bc it asked for deduction not income nor tax

Construction Basics (8 decks)

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