Deck 16: Real Estate and High-Risk Investments

Question 1

Capital improvements are costs incurred in making changes in real property that add to its value.

Answer 1

True

Question 2

Planting trees and shrubs on your rental property is an example of a capital improvement.

Answer 2

True

Question 3

Raw land and residential lots are the safest forms of real estate investment.

Answer 3

False

Question 4

The amount of money left over after paying operating expenses in an income producing investment is called profit.

Question 5

The most positive characteristic of a real estate investment is its low degree of risk.

Question 6

The higher the loan-to-value ratio,the greater the amount of leverage in an investment project.

Question 7

Painting a rental property is an example of a repair.

Question 8

When an asset does not generate a readily quantifiable return (such as rent,interest,or dividends),its value is mainly determined by supply and demand.

Question 9

Speculative investments have the potential for significant fluctuations in return,sometimes over short time periods.

Question 10

Using borrowed funds to increase the rate of return on an investment is called leverage.

Question 11

Most investors prefer to show a negative cash flow on a real estate investment.

Question 12

Capital gains on real estate are realized through price depreciation.

Question 13

Ownership costs include the cost of capital improvements as well as the original cost of the property.

Question 14

Commercial property purchased to rent to other is designed for residential living such as houses,duplexes,apartments,mobile homes,and condominiums.

Question 15

Examples of residential real estate investments include office buildings,medical centers,and gas stations.

Question 16

When directly owning a real estate investment,the actual title is held by the investors.

Question 17

Commercial properties are generally more risky investments than residential properties.

Question 18

During times of high mortgage interest rates,real estate investors can expect a positive cash flow.

Question 19

A real estate bubble is rapid and unsustainable increases in home prices followed by sharp declines in values.

Question 20

The loan-to-value ratio measures the amount of leverage in a real estate investment project.

Question 21

One receives an actual title to property with the right-to-use purchase of a timeshare

Question 22

Timesharing should be considered vacation plans rather than real estate investments.

Question 23

Failing to factor in income lost due to vacancies and collection costs for tenants who do not pay is a mistake that real estate investors may make.

Question 24

A primary advantage of real estate investing is liquidity.

Question 25

Deeded timesharing provides buyers with actual titles and deeds to limited time periods of use of real estate.

Question 26

One advantage of an investment in real estate is that leverage can increase an investor's return.

Question 27

Investors in real estate enjoy a high level of liquidity.

Question 28

A tax-free exchange is another tax treatment that results when a real estate investor trades equity in one property for equity in a similar property.

Question 29

The cost of financing investment property is shared by the government due to tax deductions on interest expenses.

Question 30

Investment in real estate generally requires many thousands of dollars,often with an initial outlay of $15,000 or more.

Question 31

Suni invested $100,000 in rental property for which she received $10,000 rent.She will have to pay taxes on the full $10,000 rental income.

Question 32

A speculator is someone who buys an asset in the hope that someone else will pay more for it in the near future.

Question 33

The services of a real estate attorney will be needed to help handle the real estate purchase,sale,building inspections,zoning issues,tenant problems,insurance disputes,and any liability issues.

Question 34

Juan traded a rental house he had purchased for $100,000 six years ago to Randy for a rental house worth $125,000.Juan will have to pay taxes this year on $25,000 capital gain.

Question 35

Depreciation is the decline in value of an asset over time due to normal wear and tear and to obsolescence.

Question 36

The discounted cash-flow method is an effective way to estimate the value or selling price of a real estate investment.

Question 37

Transfer costs are generally 6 to 7 percent of the property's sale price.

Question 38

A crude rate of return is a rough measure of the yield on amounts invested that assumes that equal portions of the gain are earned each year.

Question 39

Borrowing to finance a real estate investment is more expensive than borrowing to buy one's own home.

Question 40

The IRS allows interest and real estate tax deductions on a second home.

Question 41

Low-risk investors can profit from increases or decreases in the prices of various commodities and commercial products by buying and selling futures contracts.

Question 42

Successful investors in speculative investments must always be alert to market developments regarding their investments.

Question 43

Hedge funds are limited to "accredited investors and purchasers" who have incomes over $1 million.

Question 44

People who want to invest speculatively in currencies can do so on the forex exchange.

Question 45

Some people are persuaded by telemarketers to buy precious metal and stones.

Question 46

If the market price of an asset rises to exceed the striking price plus the premium,the holder could make a substantial profit.

Question 47

Scams and frauds abound with collectibles as investments.

Question 48

The writer of a put may incur a loss when the market price of an optioned asset rises above the striking price.

Question 49

If you put money into collectibles,limit your investment to no more than 20 percent of your portfolio.

Question 50

Buying and selling options are techniques used by both conservative and aggressive investors.

Question 51

Aggressive investors take a particularly speculative position when they do not own the underlying asset,as when they buy naked options or sell naked puts.

Question 52

A buyer of a futures contract benefits if the price of the commodity increases.

Question 53

Puts allow the holder of the contract to sell an asset at a specific striking price for a certain time period before the expiration date.

Question 54

You might want to sell an option to prevent further losses if its market price is dropping.

Question 55

Most options expire without being exercised.

Question 56

One of the limitations to purchasing a hedge fund is that you must own investments over $1 million.

Question 57

Puts are a conservative investment that can be used to reduce market risk.

Question 58

As a conservative investor,you can profit by selling a call on stock already owned,giving the buyer the right to purchase your shares at a fixed strike price for a time period.

Question 59

A call option is an option contract that gives the option holder the right to sell the optioned asset from the option writer at the striking price.

Question 60

People who pursue options and futures investments should have a moderate-to-aggressive investment philosophy.

Question 61

When an investment is termed a zero-sum game,the collective wealth of all investors remains the same if transaction costs are ignored.

Question 62

The ____ is a computation of how much income the investor might pocket from rent each year before mortgage payments as a percentage of the purchase price.

A)current income
B)cash flow
C)rental yield
D)price-to-rent ratio

Question 63

What is the price-to-rent ratio for a condominium that rents for $1,200 per month and has a market value of $279,000?

A)3.9
B)7.8
C)232.5
D)19.4

Question 64

If you receive $24,000 in annual rent on property that costs you $250,000,what is your rental yield on this property?

A)14.4 percent
B)4.8 percent
C)57.6 percent
D)9.6 percent

Question 65

Beneficial tax treatments for real estate cash flow include all of the following except

A)repairs.
B)interest deductions.
C)tax-free exchanges.
D)depreciation deductions.

Question 66

Paul's marginal tax bracket is 28 percent.He has taxable income of $5,000 on his real estate investment.His tax liability on this income is

A)$0.
B)$1,400.
C)$1,500.
D)$3,200.

Question 67

Under the depreciation provisions applying to real estate,which of the following statements is false?

A)The value of the land and property is added together and divided by the depreciation factor.
B)The guidelines for residential and commercial properties are 27.5 and 39 years, respectively.
C)Depreciation can be deducted from the cost of the asset over the asset's estimated life.
D)The IRS allows the investor to deduct depreciation from income earned.

Question 68

It is sometimes possible to buy a real estate investment at a bargain price if the current lender on the property in foreclosure is willing to accept less than the full amount owed on the mortgage by using a

A)deficiency amount.
B)short sale.
C)bridge loan.
D)reverse mortgage.

Question 69

Rapid and unsustainable increases in home prices followed by sharp declines in values is referred to as

A)real estate (or housing) bubble.
B)inflation
C)leverage.
D)deflation.

Question 70

The amount of cash flow in income-producing real estate investments depends on

A)rent received.
B)expenses paid.
C)method of repaying mortgage debt.
D)All of these.

Question 71

Most of the total return from a real estate investment usually comes from

A)high mortgage rates.
B)cash flow.
C)price appreciation.
D)capital improvements.

Question 72

High-risk investments include

A)collectibles.
B)options.
C)futures contracts.
D)All of these

Question 73

Capital gains on real estate are realized through

A)price appreciation.
B)price depreciation.
C)depreciation deduction.
D)liquidity.

Question 74

____ is a repair expense for rental property rather than a capital improvement.

A)Painting the kitchen
B)Remodeling the garage into a game roomc
C)Adding a new patio
D)Building a sidewalk

Question 75

Real estate does not include

A)land.
B)permanent structures.
C)furniture.
D)mineral rights.

Question 76

The average rate of return for all investors in futures is zero.

Question 77

____ is not an example of a capital improvement.

A)Adding a new roof
B)Fixing a plumbing leak
C)Remodeling a kitchen.
D)Putting in a sprinkler system

Question 78

Karen purchased a rental property in 1995 for $45,000.In 2005 she traded this property and $10,000 in cash for a rental property valued at $105,000.In 2014,Karen sold that property for $135,000.What was her taxable income when she sold the property in 2014?

A)$10,000
B)$30,000
C)$80,000
D)$90,000

Question 79

Patrick invested $55,000 and borrowed $105,000 for an investment worth $160,000.What was the loan-to-value ratio?

A)48 percent
B)66 percent
C)34 percent
D)52 percent

Question 80

Max paid $15,000 and borrowed $90,000 for an investment worth $105,000.What was the loan-to-value ratio?

A)10 percent
B)14 percent
C)86 percent
D)90 percent