Deck 26: Investing in Real Estate

Question 1

An investment property was purchased in 2008 for $180,000. The land accounted for 30% of this value. If figured on a 30-year life, what was the book value of this property after one year of straight-line depreciation?

A) $54,000
B) $121,800
C) $126,000
D) $175,800

Answer 1

D
The depreciable base is 70% of the total investment (30% is land which doe not depreciate);so 180,000 × .70 = 126,000;each year 1/30ᵗʰ can be depreciated;so in the first year they can deduct 1/30 × 126,000 = 4,200;the value of the asset after one year is 180,000 - 4,200 = 175,800.

Question 2

If an investor uses $250,000 of his own money when buying a $500,000 building, he is using

A) 50% leverage.
B) 100% leverage.
C) 200% leverage.
D) capital gains.

Answer 2

A
If an investor uses $250,000 of his own money when buying a $500,000 building, he is using 50% leverage.

Question 3

Weldon bought a duplex and lives in one half. On his tax report, he can deduct

A) all expenses on only the half he lives in.
B) all expenses on the rented half.
C) all expenses on both halves.
D) no expenses because it is his residence.

Answer 3

B
Weldon can deduct all expenses on the rented half.

Question 4

A rental property produces $2,000 per month in rents and consumes $600 per month in operating expenses. The mortgage payment is $1,200 per month. For the investor, this property produces a

A) positive cash flow.
C) negative flow.
D) break even cash flow.

Question 5

An investor is using borrowed money to increase the rate of return on a cash investment in an income property. He is

A) using leverage.
B) using a trust deed.
C) kiting.
D) insolvent.

Question 6

Roberto has been depreciating a piece of residential income property for 17 years.He then sells it to Pauline. How many more years can Pauline depreciate the property?

A) 10 1/2 years
B) 17 years
C) Up to 27 1/2 years
D) It depends on cash flow and Pauline's tax rate

Question 7

The type of depreciation in which a fixed yearly sum is subtracted from the depreciable value of the property is called

A) sum of the years digits.
B) straight-line.
C) double declining balance.
D) accelerated.

Question 8

Which of the following real property investments is most likely to produce the largest annual depreciation allowance expressed as a percentage of owner's equity? Assume each is newly purchased for 100% cash.

A) Large tract of land
B) Old apartment building
C) Retail business in rented space
D) New business

Question 9

An owner is using straight-line depreciation over a 27 1/2 year period on a $65,000 rental unit. If the improvements are worth $55,000, what is the depreciation in the first year?

A) $2,000.00
B) $2,181.81
C) $2,363.63
D) $4,363.63

Question 10

You are offered a four-unit residential building in which each unit rents for $500 per month. Given a 5 percent vacancy rate, operating expenses of $700 per month, and mortgage payments of $1,500 per month, you can anticipate a monthly

A) net spendable income of $200.
B) net spendable income of $300.
C) negative cash flow of $200.
D) negative cash flow of $300.

Question 11

When one holds unimproved land as an investment, expenses such as taxes and interest are

A) not deductible for income tax purposes.
B) deductible in the year in which the expenses are incurred.
C) deductible the following year.
D) deductible only when the property is sold.

Question 12

A property is purchased for $50,000 with a $45,000 loan. Several years later the loan has been reduced to $40,000 and the property is sold for $55,000. What is the seller's equity build-up at the time of sale?

A) none
B) $5,000
C) $10,000
D) $15,000

Question 13

If a potential investment is referred to as an alligator or loss, the investor knows he can expect

A) water problems.
B) a negative cash flow.
C) no profit.
D) a break even investment

Question 14

A real estate agent buys a house and lot for $49,900. He spends $1,200 to remodel it. What price must he sell the property for to realize a 20% profit?

A) $61,320
B) $58,440
C) $59,880
D) $42,583

Question 15

When the benefits of borrowing money for investing exceeds the costs of borrowing, you have

A) negative leverage.
B) positive leverage.
C) usury.
D) capitalization rate.

Question 16

If vacancies and collection losses, property taxes, expenses of operation and loan service are deducted from the gross income, you have

A) internal rate of return.
B) taxable income.
C) net spendable income.
D) net worth.

Question 17

To be considered a good investment, when a property which generates a negative cash flow is sold,

A) there must be a substantial increase in property value.
B) there need be little increase in property value.
C) the investor is best off if the property has decreased in value.
D) there must be a substantial down payment.

Question 18

Which of the following is necessary in order to calculate cash flow?

A) Monthly appreciation
B) Mortgage balance
C) Monthly rents
D) Economic rents

Question 19

A woman owns an $86,000 house on which she pays $329 per month interest. If she is in a 28% tax bracket, how much less tax will she have to pay per year because she owns it?

A) $131.60
B) $653.49
C) $1,105.44
D) $2,763.60

Question 20

Two investors buy a house for use as a rental property. Their accountant tells them they can deduct depreciation on 80% of the $76,000 value over 27 1/2 years. How much can they deduct in the third year of ownership?

A) $2,211
B) $4,422
C) $6,633
D) $6,756

Question 21

A United States taxpayer can, on his income tax report, deduct depreciation on a tenant occupied suburban home.

Question 22

Considering an apartment building, a retail business in a leased space, a housing subdivision selling finished homes or an unimproved tract of land, the apartment building is most likely to result in a negative cash flow.

Question 23

A four unit quadruplex has rental income of $500 per month per unit. Given a 5% vacancy rate, operating expenses of $700 per month, and mortgage payments of $1,500 per month, you can anticipate a monthly

A) net spendable of $200.
B) net spendable of $300.
C) negative cash flow of $200.
D) negative cash flow of $300.

Question 24

An owner-occupied residence cannot be depreciated for federal income tax purposes.

Question 25

Mortgage balance reduction is

A) an out-of-pocket expense.
B) a deduction for tax purposes.
C) tax-exempted.
D) quite large at the beginning of the loan period.

Question 26

When an investor speaks of an investment that will pencil out, she means there will be more book work involved than the investment justifies.

Question 27

One of the main advantages of being a limited partner is

A) the profits of a limited partner are tax free.
B) limited partners can help with management.
C) limited partners are not held responsible for management.
D) limited partners are separate legal persons.

Question 28

In a general partnership

A) each partner has limited financial liability.
B) each partner pays individual taxes on his or her share of the partnership's earnings.
C) the right of survivorship exists.
D) individual shares are not taxed.

Question 29

The limited partnership has become popular as a means of owning real estate because of

A) limited ability to finance large properties.
B) maximum management responsibility.
C) direct pass-through of profits.
D) unlimited liability.

Question 30

The value of depreciation on an investment property is

A) inversely proportional to the investor's tax bracket.
B) the same to all investors, regardless of their tax bracket.
C) directly proportional to the investor's tax bracket.
D) not a factor in the investment decision.

Question 31

Accelerated depreciation schedules, set up before the Tax Reform Act of 1986 became effective, were grand fathered in and did not change.

Question 32

If an investor wanted to put leverage to its best advantage, he would purchase property by investing all of his own cash and borrowing as little as he can.

Question 33

Which of the following age groups should be the most cautious in terms of investment risk taking?

A) 35-45 years
B) 45-55 years
C) 55-65 years
D) 65+ years

Question 34

An individual investor who is seeking the advantages of a partnership, but who wishes to avoid unlimited financial liability would join a limited partnership.

Question 35

Tax laws will not allow depreciation on a building to be started over each time the property is sold.

Question 36

Equity buildup in a property can be the result of mortgage reduction and appreciation.

Question 37

A negative cash flow may be offset by

A) tax shelter.
B) appreciation.
C) both a and b.
D) neither a nor b.

Question 38

Monetary benefits of investing in real estate come from

A) cash flow.
B) tax shelter.
C) mortgage reduction.
D) all of the above.

Question 39

If an investor is seeking the greatest risk and the greatest return, when should he buy?

A) Before construction
B) During construction
C) After construction
D) Upon occupancy by anchor tenants

Question 40

As a rule of thumb, for the investor to break even, the value of raw land must double every 10 years.

Question 41

A limited partnership wherein properties are purchased after the limited partners have invested their money is called a ____________________ pool partnership.

Question 42

The income tax savings that an investment can produce for its owner is called a tax ____________________.

Question 43

In a partnership, the risk of losing one's money is referred to as a ____________________ risk.

Question 44

To be considered a good investment, when a property that has a negative cash flow is sold there must be a substantial increase in property value.

Question 45

The impact that borrowed funds have on investment return is known as leverage.

Question 46

Tax shelter in real estate is not available for rent houses.

Question 47

In an effort to encourage individuals to rebuild older structure, Congress has had a policy of giving ____________________ tax credits.

Question 48

In contrast to straight-line depreciation, ____________________ depreciation is any method that allows depreciation at a rate faster than straight-line.

Question 49

Negative leverage occurs when an investment property depreciates in value.

Question 50

If an investor has to dip into cash reserves to keep a property going, the property has a ____________________ cash flow.

Question 51

The cash-on-cash ratio for a property that has a cash flow of $16,900 and could be purchased with a down payment of $130,000 would be 7.69%.

Question 52

Equity build-up can result from appreciation as well as debt reduction.

Question 53

For most people, the best time to invest in high-risk investments is between the ages of 55 and 65.

Question 54

A disclosure statement given prospective investors in a limited partnership, outlining the plan and prospects for the partnership as called a cash flow projection.

Question 55

____________________ is the increase in property value that the owner hopes will occur while owning it.

Question 56

In a typical limited partnership, the organizers are ____________________ partners.

Question 57

In the various phases in the life cycle of improved real estate investments, ____________________ come between tenancy stage and the maturity stage.

Question 58

To insure that information on the soundness of an investment is passed on the prospective investors, several states have enacted ____________________ laws.

Question 59

In a limited partnership, the limited partners cannot lose more than the amount they have invested.

Question 60

In a typical limited partnership, the organizers are the limited partners.

Question 61

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
results from mortgage reduction and price appreciation

Question 62

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
financing where the borrower is not personally liable

Question 63

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
requires the investor to dip into her own pocket

Question 64

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
a limited partner who does not materially participate on a "regular, substantial, and continuous basis"

Question 65

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
a plan to balance the returns available with the risks that must be taken to achieve those returns

Question 66

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
limited partnership that can be traded on a stock exchange nearly as easily as corporate stock

Question 67

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
the cash flow of a property divided by the amount of cash needed to purchase it

Question 68

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
any method of depreciation that achieves a faster rate of depreciation than the straight-line method

Question 69

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
income tax savings that an investor can produce for its owner

Question 70

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
a limited partnership wherein properties are purchased after the limited partners have invested their money

Question 71

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
number of dollars remaining each year after collecting rents and paying operating expenses and mortgage payments

Question 72

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
the impact that borrowed funds have on investment return

Question 73

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
if the borrowed funds cost more than the benefits they are producing

Question 74

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
a method of calculating depreciation that takes equal amounts of depreciation each year

Question 75

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
an investor who takes an active role in property management, as defined by income tax law

Question 76

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
increase in property value that the owner hopes will occur while owning it

Question 77

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
the possibility that an investor will lose his money in an investment

Question 78

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
a disclosure statement that describes an investment opportunity

Question 79

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
as defined by tax law, the amount an investor risks in an investment

Question 80

Choose the one most appropriate answer for each.
a.accelerated depreciation
k.investment strategy
b.active investor
l.leverage
c.appreciation
m.master limited partnership
d.at-risk rules
n.negative cash flow
e.blind pool
o.negative leverage
f.cash flow
p.non-recourse financing
g.cash-on-cash
q.passive investor
h.downside risk
r.prospectus
i.equity build-up
s.straight-line depreciation
j.GLITAMAD
t.tax shelter
an acronym that refers to the various phases of the life cycle of improved property