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Real Estate Exam! > Unit 17: Real Estate Investments and Business Opportunity Brokerage > Flashcards

Unit 17: Real Estate Investments and Business Opportunity Brokerage Flashcards

1
Q

True/False A lack of maintenance is called deferred maintenance.

A

True

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2
Q

True/False Negative leverage occurs when the benefits of borrowing exceed the costs of borrowing.

A

False. If the benefits of borrowing exceed the costs of borrowing, it is called positive leverage. If the borrowed funds cost more than they are producing, it is called negative leverage.

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3
Q

True/False The ability to sell an investment quickly without loss of capital is called leverage.

A

False. Liquidity refers to the ability to sell an investment very quickly without loss of capital.

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4
Q

True/False Real estate investments require active management.

A

True. One of the disadvantages of investing in real estate is the need for active management.

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5
Q

True/False A disadvantage of investing in real estate is the relatively high degree of risk.

A

True

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6
Q

True/False An advantage of investment in real estate is that real estate is typically highly leveraged.

A

True. An advantage of real estate investments is the leverage of borrowed money. An investor can usually borrow 70%–75% of the appraised value to finance a real estate investment.

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7
Q

True/False Business risk is associated with the degree of variance between projected income and expenses and actual income and expenses.

A

True. Business risk is the probability that projected income will not be achieved or will not be adequate to meet operating expenses.

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8
Q

True/False Purchasing power risk is associated with inflation.

A

True. If rents are fixed by the lease, the gross income may not keep pace with inflation, because the operating expenses increase at the inflation rate will hold rents steady.

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9
Q

True/False Safety risk is composed of financial risk and risk of default.

A

False. Safety risk is composed of market risk (possible loss of invested capital) and risk of default (possible loss of earnings).

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10
Q

True/False An active real estate license is required to perform business brokerage activities for others.

A

True

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11
Q

True/False One of the ways business brokerage is different from real estate brokerage is that business brokerage includes intangible assets.

A

True. Business brokerage usually involves assets other than real estate, such as personal property and goodwill.

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12
Q

True/False The going-concern value of a business may be different from the real estate value.

A

True. The going-concern or total value of an established business may differ from the value of the real estate. Going concern value is the value of an established business property compared with the value of just the physical assets of a business that is not yet established.

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13
Q

True/False Liquidation analysis may be necessary because of the death of a sole proprietor.

A

True

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14
Q

True/False The methods used to estimate the value of a business are very different from the techniques used to appraise real property.

A

False. The methods employed to arrive at an estimate of a business’s value consist of techniques similar to those used in appraising real property with one additional technique called liquidation analysis.

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15
Q

True/False One of the steps in the sale of a business is to subtract the value of all liabilities (including the value of preferred stock) from the value of the business.

A

True

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16
Q

True/False It is advisable to have the buyer sign a confidentiality (nondisclosure) agreement before releasing financial information concerning the business.

A

True

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17
Q

is the process of determining the extent to which real estate investments achieve an investor’s objectives.

A

Real estate investment analysis

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18
Q

is the increase in property value over a period of time due to economic causes.

A

Appreciation

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19
Q

are the entire resources of a business. An asset is anything of value. A tangible asset can be touched and has actual substance. An intangible asset has value but does not have physical substance, such as the goodwill of a business. The difference between assets and liabilities is net worth.

A

Assets

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20
Q

is the total amount of spendable income generated from an investment. It is the total amount of money remaining after all expenditures have been paid. Cash flow may be positive or negative.

A

Cash flow

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21
Q

is the property’s value minus debt.

A

Equity

22
Q

is the use of borrowed funds to finance the purchase of an asset. Positive leverage occurs when the benefits exceed the cost of borrowing. Negative leverage occurs if the borrowed funds cost more than they are producing.

A

Leverage

23
Q

refers to the ability to sell an investment very quickly without loss of capital.

A

Liquidity

24
Q

is an investor’s initial cost of the property. The basis is adjusted by adding any capital improvements made to the property and deducting depreciation expenses taken on tax returns during the years of ownership.

A

Basis

25
Q

is the difference between the adjusted basis of property and its net selling price. A capital gain or capital loss has tax consequences to the owner of investment property.

A

Capital gain (or loss)

26
Q

is the term used to describe advantages of owning real estate investments. An investment is a tax shelter when it shields income from payment of income taxes.

A

Tax shelter

27
Q

offer investors the opportunity to invest in a pool of income-producing properties under professional management.

A

Real estate investment trusts (REITs)

28
Q

Investors can choose from several types of real estate investments:

A

residential, commercial, industrial, agricultural, and business opportunities.

29
Q

Advantages of real estate investment include the following:

A

rate of return, tax advantages, hedge against inflation, leverage, and equity buildup.

30
Q

Disadvantages of investing in real estate include the following:

A

illiquidity, local market, need for expert help, management requirements, and risk.

31
Q

is the chance of losing all or part of an investment.

A

Risk

32
Q

Risk associated with general business conditions include the following:

A

business risk, financial risk, purchasing-power risk, and interest-rate risk.

33
Q

Business brokerage and real estate brokerage similarities include

A

(1) the sale of real property or assignment of a long-term lease may be involved; and (2) an active real estate license is required for business brokerage and real estate brokerage.

34
Q

Business brokerage differs from real estate brokerage in three ways.

A

Business brokerage (1) may include personal property and goodwill assets; (2) the going-concern value may differ from real estate value; and (3) business brokerage may have a wider geographic market.

35
Q

is the value of an established business property compared with the value of just the physical assets of a business that is not yet established.

A

Going-concern value

36
Q

is a concise summary of all income and expenses of a business for a stated period of time.

A

An income statement

37
Q

A balance sheet

A

shows the company’s financial position at a stated moment in time.

38
Q

Expertise required in business brokerage includes

A

corporate finance, business accounting, and valuation of businesses.

39
Q

The methods of appraising a business are

A

comparable sales analysis, reproduction or replacement cost, income analysis, and liquidation analysis.

40
Q

An advantage of real estate as an investment is

A) the leverage of borrowed money.
B) a localized market.
C) risk.
D) active management.

A

A) leverage of borrowed money. The goal of leveraging is to increase one’s yield on equity by using borrowed funds.

41
Q

Intangible assets of a business does NOT include

A) trademarks.
B) inventory.
C) customer loyalty.
D) goodwill.

A

B) inventory. An intangible asset is something of value lacking physical substance, existing only in connection with something else such as the goodwill of a business.

42
Q

The buyer should sign which type of agreement before releasing financial information concerning a business?

A) Financial statement
B) Listing agreement
C) Latent defect disclosure
D) Confidentiality (nondisclosure) agreement

A

D) confidentiality (nondisclosure) agreement. The buyer should sign a confidentiality (nondisclosure) agreement before releasing the name of the business or its financials to the buyer.

43
Q

Which accounting term refers to the total amount of money generated from an investment after the expenses are paid?

A) Assets
B) Capital
C) Cash flow
D) Equity

A

C) cash flow. Cash flow is the total amount of money generated from an investment after expenses have been paid.

44
Q

The cost to duplicate the business structure being appraised having the same use but differing physically somewhat is called

A) cost analysis.
B) reproduction cost.
C) benchmarking.
D) replacement cost.

A

D) replacement cost. When replacement cost is used, the appraiser calculates the cost that would result in a building having the same use and capabilities as the one being appraised, even though the new building might differ physically.

45
Q

A case in which the interest paid for borrowed funds is more than the overall rate of return to an investor is an example of

A) negative leverage.
B) liquidity.
C) positive leverage.
D) yield.

A

A) negative leverage. If the interest paid for borrowed funds is more than the overall rate of return from an investment, the investor’s real yield is decreased, resulting in negative leverage.

46
Q

Which type of risk is also called inflation risk?

A) Interest-rate risk
B) Business risk
C) Purchasing-power risk
D) Liquidity risk

A

C) purchasing-power risk. Purchasing power risk reflects the fact that inflation may cause the investor to be paid back with less valuable dollars.

47
Q

The value of an established business property, compared with the value of just the physical assets of a business that is NOT yet established, is called

A) goodwill.
B) business enterprise.
C) going-concern value.
D) tangible assets.

A

C) going-concern value. Going-concern value is the value of an established business property compared with the value of just the physical assets of a business that is not yet established.

48
Q

Which financial report indicates the results of business operations over a specific period of time?

A) Balance sheet
B) Depreciable asset statement
C) Working capital statement
D) Income statement

A

D) income statement. The income statement is a concise summary of all income and expenses of a business for a stated period of time.

49
Q

The market value of an apartment building is $475,900. The investor has leveraged $380,720. What is the investor’s equity in the property?

A) $380,720
B) $95,180
C) $475,900
D) $50,000

A

B) $95,180. The solution is $475,900 market value – $380,720 leverage amount = $95,180 equity.

50
Q

An advantage of real estate investment trusts is

A) that more recordkeeping is required.
B) that it offers diversification.
C) special tax incentives to purchasers not available in other types of investments.
D) stock brokerage fees.

A

B) that it offers diversification. REITs offer investors the opportunity to invest in income-producing real estate properties. REITs are attractive because they offer diversification and liquidity.

51
Q

All the resources of a business, including tangibles and intangibles, are called the

A) assets.
B) capital.
C) gross income.
D) cash flow.

A

A) assets. Assets are the entire resources of a business, including tangibles and intangibles such as accounts and notes receivable, cash, inventory, equipment, real estate, and goodwill.

Real Estate Exam! (20 decks)

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