Question 1

A property,if sold today,will provide the equity investor with $150,000 in cash flow after taxes.If the property is held,the annual after-tax cash flow received by the investor will be as follows: $18,000 for years 1 to 5,$24,000 for years 6 to 10.If held and sold in 10 years,the property is expected to provide $180,000 in after-tax cash flow to the investor.What should the investor do if she can receive a 14% rate of return by investing the sales proceeds today in an different project?

Accepted Answer

B

Question 2

Which of the following factors would NOT be considered when an investor is trying to decide whether to hold or sell a property at the end of year five?

Accepted Answer

A

Question 3

An investor is considering refinancing a property.The current mortgage has an interest rate of 8.75% and a mortgage balance equal to 45% of the property value due to amortization of the loan and some appreciation in value.However,the investor would like to refinance at an amount equal to 75% of the property value.He has found out that the property can be refinanced at a 75% loan-to-value ratio for 9.5% interest over 15 years.What can be said about the incremental cost of refinancing?

Accepted Answer

A

Question 4

Which of the following represents the formula for the annual marginal rate of return (MRR)when trying to decide whether to hold or sell a property? ATCF_S equals the after-tax cash flow from sale and ATCF_O equals the after-tax cash flow from operations.

Accepted Answer

The formula for annual MRR is the increase in after-tax cash flow from sale and operations divided by the current year after-tax cash flow from operations. Therefore, the correct formula is MRR = (ATCF_S (year t + 1) + ATCF_O (year t + 1) - ATCF_S (year t)) / ATCF_S (year t). Option C is the only one that matches this formula.

Question 5

The marginal rate of return can be defined as:

Accepted Answer

The marginal rate of return refers to the additional return earned by holding the property for one more year. It is a measure of the increase or decrease in returns that results from a small change in the holding period. Therefore, option A is the correct definition of the marginal rate of return. Option B refers to the concept of the internal rate of return, while option C relates to the incremental return resulting from a property improvement. Option D describes the calculation of the IRR where the net present value equals zero.

Question 6

Given the same expectations for future rents and expenses,a new buyer may earn a different after-tax return than the current owner of the same property.

Accepted Answer

The new buyer may have a different tax situation and may incur different expenses and financing costs, which can affect their after-tax return compared to the current owner.

Question 7

An investor purchased a building in 1982 when the building could be depreciated over 19 years.A new investor is interested in purchasing the building in 1992 when the depreciable life according to tax laws is 31.5 years.Assuming both investors are in the same tax bracket and that everything else is equal,what can be said about the after-tax cash flow received by the new investor as compared to the after-tax cash flow that would be received by the original owner of the building?

Accepted Answer

The new investor will have a lower after-tax cash flow because the depreciable life has been extended, which means that the annual depreciation expense will be lower. This reduced depreciation expense will result in a higher taxable income for the owner and a higher tax liability, leading to a lower after-tax cash flow.

Question 8

A property should be sold when which of the following occurs?

Accepted Answer

When the marginal rate of return is falling and becomes equal to the reinvestment rate, it is no longer profitable to keep the property and it should be sold. This ensures that the investor can still earn at least the same rate of return by reinvesting the proceeds from the sale.

Question 9

Which of the following is NOT a benefit to Refinancing?

Accepted Answer

Refinancing does not inherently decrease risk; it can sometimes increase risk by increasing debt obligations.

Question 10

An investor is considering renovating a building.Total cost of renovations are expected to be $100,000 of which 75% can be borrowed.Given the after-tax cash flows to the equity investor as showed below,what is the incremental return from renovating?

Accepted Answer

The answer of An investor is considering renovating a building.Total...

Question 11

Disposition when dealing with real estate means which of the following?

Accepted Answer

Disposition in real estate refers to the sale or transfer of ownership of a property. It is the final step in the real estate transaction process.

Question 12

An investor purchased a property expecting to receive a 14% rate of return.However,the rate of return on the property over a 5 year holding period turned out to be only 11.5%.Therefore,the property should be sold.

Accepted Answer

The rate of return on the property is still positive at 11.5%, so selling the property may not necessarily be the best option. The investor should consider other factors such as market conditions, potential for future appreciation, and potential rental income before deciding to sell the property.

Question 13

A property worth $16 million can be refinanced with an 80% loan at 9.5% over 20 years.The balance on the current loan is $12,148,566.Loan payments are $113,302 per month.The loan balance in 10 years will be $8,396,769.If the property is expected to be sold in 10 years,what is the incremental cost of refinancing?

Accepted Answer

The answer of A property worth $16 million can be...

Question 14

The benefits of equity buildup in a property are lessened over time because with an amortizing mortgage,an investor will lose some tax benefits each year as the interest portion of the payments decreases.

Accepted Answer

As the interest portion of the mortgage payments decreases over time, so do the tax benefits associated with it. As a result, the benefits of equity buildup in a property are lessened over time.

Question 15

An investor calculates an incremental return of renovating a building of 14%.Other properties provide a 12.5% overall rate of return to equity investors.Therefore,the property is a good investment.

Accepted Answer

The incremental return of renovating a building being higher than the overall rate of return of other properties does not automatically make it a good investment. Other factors such as risk, market conditions, and investment horizon must also be considered.

Question 16

The return calculated assuming the property is held for one additional year is referred to as the

Accepted Answer

The answer of The return calculated assuming the property is...

Question 17

After the 1986 tax law change,investors that already owned properties had to change the way they were depreciating the properties.

Accepted Answer

The answer of After the 1986 tax law change,investors that...

Question 18

Which of the following cash flows would be considered when an investor is trying to decide whether to renovate a property?

Accepted Answer

The cash flow that would be considered when an investor is trying to decide whether to renovate a property is the difference between future operating income if renovated and if not renovated. This is because renovating a property will have an impact on future operating income, and the investor needs to consider whether the renovation will result in a positive or negative impact on cash flow. The other options listed, such as after-tax operating income before renovation, after-tax cash flow from sale the year of renovation, and the mortgage balance on the property the year before renovation, are not relevant to the decision of whether to renovate the property.

Question 19

A property could be sold today to provide an after-tax cash flow from sale of $800,000.The current after-tax cash flow from operations is $20,000,which is expected to grow by 4% per year.If sold next year,the property is expected to provide an after-tax cash flow of $824,000.What is the marginal rate of return for holding the property for an additional year?

Accepted Answer

To find the marginal rate of return for holding the property for an additional year, we need to calculate the difference between the after-tax cash flow from selling the property this year and the after-tax cash flow from operations plus the after-tax cash flow from selling the property next year (discounted by one year).

The after-tax cash flow from selling the property this year is $800,000. The after-tax cash flow from operations plus the after-tax cash flow from selling the property next year (discounted by one year) is:

$20,800,000/(1+0.04) + $824,000/(1+0.04)^2 = $800,605.26

Therefore, the marginal rate of return for holding the property for an additional year is:

($800,605.26 - $800,000)/$800,000 = 0.076%

This is equivalent to 5.6% rounded to the nearest tenth, so the answer is A) 5.6%.

Question 20

In general,equity buildup tends to lower the marginal rate of return of holding a property.

Accepted Answer

As equity builds up in a property, the amount of debt decreases, resulting in a lower overall return on investment. This is because the cost of borrowing decreases with less debt, so the return on the equity portion of the investment decreases as well.

Quiz 14: Disposition and Renovation of Income Properties

Which of the following factors would NOT be considered when an investor is trying to decide whether to hold or sell a property at the end of year five?

Which of the following represents the formula for the annual marginal rate of return (MRR) when trying to decide whether to hold or sell a property? ATCF_S equals the after-tax cash flow from sale and ATCF_O equals the after-tax cash flow from operations.

The marginal rate of return can be defined as:

Given the same expectations for future rents and expenses,a new buyer may earn a different after-tax return than the current owner of the same property.

A property should be sold when which of the following occurs?

Which of the following is NOT a benefit to Refinancing?

An investor is considering renovating a building.Total cost of renovations are expected to be $100,000 of which 75% can be borrowed.Given the after-tax cash flows to the equity investor as showed below,what is the incremental return from renovating?

Disposition when dealing with real estate means which of the following?

An investor purchased a property expecting to receive a 14% rate of return.However,the rate of return on the property over a 5 year holding period turned out to be only 11.5%.Therefore,the property should be sold.

The benefits of equity buildup in a property are lessened over time because with an amortizing mortgage,an investor will lose some tax benefits each year as the interest portion of the payments decreases.

An investor calculates an incremental return of renovating a building of 14%.Other properties provide a 12.5% overall rate of return to equity investors.Therefore,the property is a good investment.

The return calculated assuming the property is held for one additional year is referred to as the

After the 1986 tax law change,investors that already owned properties had to change the way they were depreciating the properties.

Which of the following cash flows would be considered when an investor is trying to decide whether to renovate a property?

In general,equity buildup tends to lower the marginal rate of return of holding a property.

Quiz 14: Disposition and Renovation of Income Properties

Which of the following factors would NOT be considered when an investor is trying to decide whether to hold or sell a property at the end of year five?

Which of the following represents the formula for the annual marginal rate of return (MRR) when trying to decide whether to hold or sell a property? ATCFS equals the after-tax cash flow from sale and ATCFO equals the after-tax cash flow from operations.

The marginal rate of return can be defined as:

Given the same expectations for future rents and expenses,a new buyer may earn a different after-tax return than the current owner of the same property.

A property should be sold when which of the following occurs?

Which of the following is NOT a benefit to Refinancing?

An investor is considering renovating a building.Total cost of renovations are expected to be $100,000 of which 75% can be borrowed.Given the after-tax cash flows to the equity investor as showed below,what is the incremental return from renovating?

Disposition when dealing with real estate means which of the following?

An investor purchased a property expecting to receive a 14% rate of return.However,the rate of return on the property over a 5 year holding period turned out to be only 11.5%.Therefore,the property should be sold.

The benefits of equity buildup in a property are lessened over time because with an amortizing mortgage,an investor will lose some tax benefits each year as the interest portion of the payments decreases.

An investor calculates an incremental return of renovating a building of 14%.Other properties provide a 12.5% overall rate of return to equity investors.Therefore,the property is a good investment.

The return calculated assuming the property is held for one additional year is referred to as the

After the 1986 tax law change,investors that already owned properties had to change the way they were depreciating the properties.

Which of the following cash flows would be considered when an investor is trying to decide whether to renovate a property?

In general,equity buildup tends to lower the marginal rate of return of holding a property.

Which of the following represents the formula for the annual marginal rate of return (MRR) when trying to decide whether to hold or sell a property? ATCF_S equals the after-tax cash flow from sale and ATCF_O equals the after-tax cash flow from operations.