Unit 2-3 Exam: Purpose & Function of RE Investment | Leverage

Question 1

An investor in real estate must consider all of the following analysis aspects EXCEPT:

a. yield
b. risks
c. pride
d. value

Answer 1

c. pride (p. 16-18)

Yield, risk, and value are all things that should be considered in real estate investment analysis. Pride may inspire taking risk, but is not a measurable or definable aspect of analysis.

Question 2

Real estate investments have all of the following advantages EXCEPT:

a. high yields
b. leverage
c. liquidity
d. personal control

Answer 2

c. liquidity (p. 17)

Real estate investments are illiquid. Unlike stocks and bonds, real estate cannot be immediately unloaded or sold and takes a longer process to do so depending on the current market cycle.

Question 3

To increase use of leverage when buying a real estate investment is to:

a. decrease its yield
b. increase its risk
c. decrease its operating expenses
d. increase its beginning book basis

Answer 3

b. increase its risk (p. 18)

Think of leverage as margin. The more margin used, the more risk you take. Same principal in real estate; future movements of the market cannot be accurately predicted, so a sound analysis with leverage helps mitigate the risk involved.

Question 4

Because of the fractured quality of the market, a real estate investment is frequently considered highly:

a. profitable
b. illiquid
c. transferrable
d. valuable

Answer 4

b. illiquid (ch. 17)

Real estate investments are illiquid. Unlike stocks and bonds, real estate cannot be immediately unloaded or sold and takes a longer process to do so depending on the current market cycle.