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Questions and Answers
What do professional real estate investors seek to optimize?
How can an investor mitigate the risk of vacancy in a building?
What should an investor do if a risk can't be mitigated prior to buying a property?
What does using a higher required rate of return result in for the investor?
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Why is prioritization key for real estate investors?
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What would happen if all risks were considered equal according to the text?
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What is the art of real estate investing according to the text?
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What is the purpose of sensitivity analysis in real estate investment?
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Why are entitlements crucial for investors when purchasing land in real estate investment?
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What do investors prioritize when evaluating risks in real estate investment?
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Study Notes
Techniques for Evaluating Real Estate Investment Risk
- Entitlements are crucial for investors when purchasing land
- The significance of a risk to an investor is based on its impact and likelihood of occurrence
- Investors must prioritize risks that can potentially impact the returns of an investment
- Professional advisors like lawyers, appraisers, and building inspectors are hired to examine additional risks
- Sensitivity analysis measures the impact of incremental changes in assumptions in a cash flow model
- Investors use sensitivity analysis to understand the significance of changes in factors like exit cap rates
- 2-sided sensitivity tables are used to measure the impact of changing 2 assumptions in a model
- Certain risks, such as events in cash flows, cannot be evaluated using sensitivity analysis
- Scenario analysis is used for higher-risk real estate investments with more variables
- Investors create downside case scenarios to understand potential worst-case returns and necessary cash requirements
- Downside case scenarios help investors mitigate risks before investing or adjust the investment decision
- Mitigating risks involves adjusting the price or not investing based on the downside case scenario.
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Description
Test your knowledge of real estate investment risk evaluation techniques with this quiz. Learn about the importance of entitlements, risk impact and likelihood, professional advisor roles, sensitivity and scenario analysis, and mitigating risks to make informed investment decisions.
