Chapter 20: Basic Real Estate Investment

Question 1

Charles bought a cabin in the mountains five years ago for $20,000. Its value went up, and today he sold it for $25,000. What percent profit did he make on his investment?
A. 20%
B. 25%
C. 33%
D. 80%

Answer 1

B. 25%
(Charles made a total of $5,000 ($25,000-$20,000). He invested $20,000 originally. $20,000 divided by $5,000 = .25 or 25%)

Question 2

Tom bought five lots several months ago for $20,000 each. During the next five months, he had the lots surveyed and divided the land into nine lots, which he later sold for $17,000 each. What was his percent profit?
A. 33%
B. 47%
C. 53%
D. 65%

Answer 2

C. 53%
(Tom bought 5 lots for $20,000 at an original cost of $100,000 (5 x $20,000). He sold them for $153,000 (9 x $17,000). He made a total of $53,000 ($153,000-$100,000). $53,000 divided by $100,000 = .53 or 53%.)

Question 3

To calculate the capital gain or loss in a real estate transaction:
A. subtract the closing costs from the sales price
B. add the closing costs to the purchase price
C. subtract the adjusted basis from the amount realized
D. subtract the amount realized from the adjusted basis

Answer 3

C. subtract the adjusted basis from the amount realized

Question 4

A homeowner listed her real estate for sale at $100,000. If her cost was 80% of the listing price, what will her percentage of profit be if her real estate is sold for the listing price?
A. 10%
B. 15%
C. 20%
D. 25%

Answer 4

D. 25%

Question 5

A couple sold their vacation home for $412,500. If they made a profit of 10%, what was the original cost of the property?
A. $360,000
B. $371,250
C. $375,000
D. $453,750

Answer 5

C. $375,000
($412,000 represents 110% of what was originally paid (100% + 10%). $412,000 divided by 1.1 (110%) = $375,000)

Question 6

An investor projects that a potential investment property will generate net operating income of $150,000 and debt service of $110,000. He wants to make a down payment of $320,000. If his projections are correct, his equity dividend rate should be:
A. 6%
B. 12.5%
C. 34.3%
D. 47%

Answer 6

B. 12.5%

Question 7

A commercial property recently sold for $528,000 and it has a net operating income of $79,200 per year. What is the rate of return (capitalization rate)?
A. 6.67%
B. 14.9%
C. 14.95%
D. 15%

Answer 7

D. 15%
(Net operating income (NOI) $79,200 divided by $528,000 =.015 or 15% capitalization rate)

Question 8

The formula for before-tax cash flow is:
A. potential gross income-vacancies-operating expenses
B. net operating income + debt service
C. net operating income-debt service
D. cash flow x amount of equity

Answer 8

C. net operating income-debt service

Question 9

The before-tax cash flow is also called:
A. cash throw off
B. equity dividend rate
C. net operating income
D. potential gross income

Answer 9

A. cash throw off

Question 10

Effective gross income equals potential gross income minus:
A. operating expenses
B. vacancy and collection losses
C. fixed and operating expenses
D. fixed operating expenses and vacancy and collection losses

Answer 10

B. vacancy and collection losses

Question 11

An apartment complex contains 30 units that each rent for $400 per month. Assuming a vacancy rate of 5% and annual operating expenses of $54,000, what would be the appraised value with a capitalization rate of 10%?
A. $828,000
B. $1,200,000
C. $1,368,000
D. $1,444,000

Answer 11

A. $828,000
(The property produces $12,000 (30 x $400) per month or $144,000 annually-$7,200 ($144,000 x 10%) for vacancies-$54,000 for operating expenses = $82,800 net operating income (NOI). $82,800 divided by .10 (10%) = value of $828,000)