Question 1

Profitability ratios,income multipliers,and financial risk ratios can be used to provide a quick assessment of a property's relative value.Which of the following ratios measures the overall income-producing ability of the property?

Accepted Answer

The capitalization rate, also known as the cap rate, measures the overall income-producing ability of a property by comparing the net operating income (NOI) to the property's value. It is often used to compare the value of different properties or to determine a purchase price. The other ratios listed measure specific aspects of a property's financial performance, such as the return on equity (equity dividend rate), ability to cover debt service (debt coverage ratio), or the efficiency of managing expenses (operating expense ratio).

Question 2

Given the following information,calculate the cash down payment required to purchase the specific property.Purchase Price: $500,000,Loan Amount: 80% of purchase price,Up-front financing costs: 2.5% of loan amount.

Accepted Answer

B

Question 3

In determining a property's before-tax cash flow from operations (BTCF)and net operating income (NOI),it is important to understand how each accounts for the use of financial leverage in its calculation.Which of the following statements is true in regards to how these two measures account for the use of financial leverage?

Accepted Answer

BTCF (Before-Tax Cash Flow) is a levered cash flow because it takes into account the property's debt service, whereas NOI (Net Operating Income) is an unlevered cash flow as it does not consider debt service, focusing solely on the property's operational income and expenses.

Question 4

Single year return measures and ratios can be categorized into three groups: profitability ratios,multipliers,and financial ratios.All of the following are considered financial ratios EXCEPT:

Accepted Answer

The answer of Single year return measures and ratios can...

Question 5

Given the following information,calculate the going-in capitalization rate for the specific property.First-year NOI: $18,750,Acquisition price: $150,000,Equity Investment: 20%.

Accepted Answer

The going-in capitalization rate is calculated by dividing the first-year NOI by the acquisition price. So, $18,750 / $150,000 = 0.125 or 12.5%.

Question 6

In an analogy to the stock market,the net operating income of a property can be viewed as which of the following?

Accepted Answer

Just like dividends are a portion of a company's profits that are distributed to shareholders as income, the net operating income of a property is the income generated by the property after deducting operating expenses. Therefore, it can be viewed as the annual dividend expected to be produced by the property.

Question 7

Unlike the debt coverage ratio,the debt yield ratio (DYR)is not affected by the interest rate or amortization period of the loan;the DYR is simply a measure of how large the NOI is relative to the loan amount.Lenders who rely on this ratio are typically willing to accept a minimum DYR of

Accepted Answer

The minimum DYR accepted by lenders can vary depending on the specific property and market conditions. However, a commonly accepted minimum DYR is 10%.

Question 8

Given the following information,calculate the debt coverage ratio for this investment.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300,Acquisition Price: $520,000,Debt service: $40,000.

Accepted Answer

Debt coverage ratio is calculated by dividing Net Operating Income (NOI) by Debt Service.

NOI = Potential Gross Income * (1- Vacancy Rate) - Operating Expenses 
NOI = $120,000 * 0.91 - $51,300 
NOI = $68,700

Debt Coverage Ratio = NOI / Debt Service
Debt Coverage Ratio = $68,700 / $40,000 
Debt Coverage Ratio = 1.72

Therefore, the answer is B: 1.45.

Question 9

Helpful in assessing the risk of lending to investors for particular projects,which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations?

Accepted Answer

The answer of Helpful in assessing the risk of lending...

Question 10

The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF)from property operations.Therefore,it is important to know that the maximum federal income tax rate on individuals as of 2012 is:

Accepted Answer

As of 2012, the maximum federal income tax rate on individuals was 35%. This information is important for investors in income-producing real estate as they need to calculate after-tax cash flow from property operations.

Question 11

In making single-asset real estate investment decisions,the first pass often involves calculating a series of returns,ratios,and multipliers.Which of the following is often cited as a limitation associated with this type of analysis?

Accepted Answer

Single-asset real estate investment decisions involve a long-term investment horizon, and the limitation of this type of analysis is that it fails to incorporate cash flows beyond the first year of the analysis. This can result in a myopic view of the real estate investment and may not accurately reflect the expected long-term returns.

Question 12

The loan-to-value ratio measures the percentage of the acquisition price (or current market value)encumbered by debt.To protect their invested capital in the event that property values do fall,commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition costs?

Accepted Answer

Commercial mortgage lenders generally require that the senior mortgage not exceed approximately 80% of the acquisition costs to protect their invested capital in the event that property values do fall.

Question 13

Given the following information,calculate the total amount of annual operating expenses for this income-producing property.Lawn care: $10,000,Property taxes: $24,000,Maintenance: $35,000,Janitorial: $25,000,Security: $32,000,Debt service: $145,000.

Accepted Answer

The total annual operating expenses include Lawn care, Property taxes, Maintenance, Janitorial, and Security, but exclude Debt service. Adding these expenses gives: $10,000 + $24,000 + $35,000 + $25,000 + $32,000 = $126,000.

Question 14

Given the following information,calculate the equity dividend rate for this investment.First-year NOI: $18,750,Before-tax cash flow: $11,440,Acquisition price: $520,000,Equity Investment: 20%.

Accepted Answer

The equity dividend rate is calculated by dividing the before-tax cash flow by the equity investment. Here, the equity investment is 20% of the acquisition price, which is 20% of $520,000 = $104,000. The before-tax cash flow is $11,440. Therefore, the equity dividend rate is $11,440 / $104,000 = 0.11, or 11%.

Question 15

Given the following information,calculate the effective gross income multiplier for the specific investment.Effective gross income: $49,500,First-year NOI: $18,750,Acquisition price: $520,000,Equity Investment: 20%.

Accepted Answer

The Effective Gross Income Multiplier (EGIM) is calculated by dividing the acquisition price by the effective gross income. So, EGIM = $520,000 / $49,500 = 10.5.

Question 16

The key to meaningful valuations in real estate is to use defensible cash flow estimates.All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT:

Accepted Answer

Considering only recent events instead of long-term trends could lead to inaccurate cash flow estimates, as it may not account for fluctuations and variations that occur over time. It is important to have a long-term perspective when evaluating revenue and expense items.

Question 17

In calculating the net operating income (NOI)of a property,the "above-line" treatment of capital expenditures implies:

Accepted Answer

The answer of In calculating the net operating income (NOI)of...

Question 18

Given the following information,calculate the operating expense ratio for this property.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300.

Accepted Answer

Step 1: Calculate the effective gross income
Effective gross income = Potential gross income x (1-vacancy rate)
Effective gross income = $120,000 x (1-0.09) = $109,200
Step 2: Calculate the operating expense ratio
Operating expense ratio = Operating expenses / Effective gross income
Operating expense ratio = $51,300 / $109,200 = 0.47 or 47%.
Therefore, the best choice is (C) with an operating expense ratio of 47%.

Question 19

The going-in capitalization rate can vary significantly by property quality.Which of the following classes of properties within a particular property type would be expected to have the highest cap rates?

Accepted Answer

Class C properties typically have the lowest quality and are located in less desirable neighborhoods. Investors may demand a higher rate of return to compensate for the higher risks associated with these properties, leading to higher cap rates. Class A properties, on the other hand, are of higher quality and are located in more desirable locations, reducing the risk for investors and leading to lower cap rates. Class B properties generally fall in between Class A and Class C in terms of quality and location, so their cap rates would be between those of Class A and Class C properties. Therefore, Class C properties would be expected to have the highest cap rates.

Question 20

Prior to determining the treatment of capital expenditures in the calculation of NOI,it is important to distinguish these costs from operating expenses.In contrast to operating expenses,capital expenditures:

Accepted Answer

Capital expenditures are investments in the property that increase its market value, unlike operating expenses which are for the day-to-day running of the property and are fully deductible in the year they are incurred. Capital expenditures typically include major improvements or additions that extend the useful life of the property, rather than minor repairs or maintenance expenses.

Quiz 18: Investment Decisions: Ratios