Quiz 17 Real Estate Investments and Business Opportunity Brokerage Flashcards
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?
A) The higher the risk, the lower the purchase price.
B) The lower the risk, the lower the purchase price.
C) The purchase price would be the same either way.
D) The higher the risk, the higher the purchase price.
A) The higher the risk, the lower the purchase price.
The Cap rate measures the amount of risk involved in the transaction; the higher the cap rate, the greater the risk to the investor. The higher the cap rate, the lower the sale price should be.
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? A) $750,000 B) $1,000,000 C) $1,545,000 D) $1,725,000
C) $1,545,000
Monthly rent from all 16 apartments = $11,500 ($2,400 + $2,900 + $3,000 +$3,200) $11,500 - $1,200 (expenses) = $10,300 (net monthly income) $10,300 x 12 = $123,600 (net yearly income) $123,600 ÷ .08 (cap rate) = $1,545,000
When an investor uses borrowed money to purchase a piece of investment property, he or she is taking advantage of A) leverage. B) capital gain. C) depreciation. D) basis.
A) leverage.
Leverage is the use of other people’s money (borrowed) to spread the risk of investment.
The term “NOI” MOST NEARLY means
A) the amount of money in annual income.
B) the amount of money left after the vacancy rate is deducted.
C) the amount of money left after the vacancy rate and operating expenses are deducted.
D) the amount of money left after the vacancy rate, operating expenses, and mortgage payments are deducted.
C) the amount of money left after the vacancy rate and operating expenses are deducted.
Net operating income (NOI) is derived by subtracting vacancy rate and operating expenses from the gross income of the property.
Accrual accounting is where
A) cash is counted as it comes in and goes out.
B) future income and future debts are shown as they are received and invoiced.
C) debts are allowed to remain unpaid.
D) income is measured as it is collected.
B) future income and future debts are shown as they are received and invoiced.
The accrual method of accounting shows future income as it is invoiced and future costs as bills are received.
What is an income tax term meaning an investment that will reduce or shield other money from income tax? A) Appreciation B) Capitalization C) Adjusted basis D) Tax shelter
D) Tax shelter
Tax shelter is an income tax term meaning an investment that will shield or reduce other money from income tax.
An example of an “intangible” asset for a business would be
A) ovens and dishes used for the business.
B) the number of tables filled every day.
C) how many workers the business needs.
D) the reputation or goodwill of the business.
D) the reputation or goodwill of the business.
An additional measurement a business is the “goodwill” of the business. Goodwill is a part of the going concern value as it measures the business’ name and customer history. This is called an intangible asset meaning that it cannot be counted physically.
In analyzing the value of a business, the method that is used to determine the value if the business were to bankrupt is called A) cost approach. B) income approach. C) comparable sales approach. D) liquidation approach.
D) liquidation approach.
A liquidation analysis would be used in the case of the bankruptcy of the current business.
The percentage which expresses the amount of risk that an investor is willing to make is called the A) cap rate. B) NOI. C) loan to value ratio. D) discount rate.
A) cap rate.
Capitalization 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. The Cap rate measures the amount of risk involved in the transaction; the higher the cap rate, the greater the risk to the investor.
When a business has been in operation for a long time, what type of value does it have? A) Market value B) Going concern value C) Tax value D) Capital value
B) Going concern value
Going-concern value is the value that an existing business would have compared to a start-up business of the same type. The existing business value takes into consideration good-will and name recognition.
Which is NOT an advantage of investing in real estate? A) Good rate of return B) Hedge against inflation C) Equity buildup D) Lack of liquidity
D) Lack of liquidity
Property lacks liquidity. Property is not always easy to sell in a quick fashion so if the market isn’t right for sale or the property hasn’t appreciated enough, the investor may not be able to sell as fast and at a price he or she seeks.
