Questions - Chapter 20 Flashcards
The term “leverage” refers to:
A. the use of a small amount of the investor’s money and a larger amount of someone else’s money to acquire a property.
B. hedging potential liability by investing with other “like minded” investors.
C. increasing your liquidity.
D. utilizing managing partners to control the day-to-day operations.
20-1 A
The term “cash flow” refers to the amount of readily spendable cash remaining after all operating expenses and which of the following have been paid?
A. no other expenses
B. depreciation
C. mortgage debt service
D. capital improvement
20-2 C
The term “liquidity” refers to:
A. the ability to convert the investment to cash in a short period of time.
B. the maximization of cash flow.
C. a situation in which the tax benefits flow through to the investors.
D. using other people’s money to purchase an investment.
20-3 A
Equity build-up is the result of
A. ability to purchase property for less than it is worth.
B. amount of down payment.
C. gradual reduction of loan balance through amortization.
D. all of the above.
20-4 D
The ability to convert an investment to cash quickly is:
A. cash flow.
B. appreciation.
C. liquidity.
D. leverage.
20-5 C
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%
T20-1 B
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%.
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%
T20-2 C
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%.
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
T20-3 C
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%
T20-4 D
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
T20-5 C
$412,000 represents 110% of what was originally paid (100% + 10%). $412,000 divided by 1.1 (110%) = $375,000.
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%
T20-6 B
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%
T20-7 D
Net operating income (NOI) $79,200 divided by $528,000 =.015 or 15% capitalization rate.
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
T20-8 C
The before-tax cash flow is also called:
A. cash throwoff
B. equity dividend rate
C. net operating income
D. potential gross income
T20-9 A
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
T20-10 B
