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2.1 Measuring Risk

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Questions and Answers

What do professional real estate investors seek to optimize?

Market share

Revenue growth

Risk-adjusted returns (correct)

Operating costs

How can an investor mitigate the risk of vacancy in a building?

Purchasing additional insurance

Hiring more property management staff

Lowering the rent to attract new tenants

Agreeing with the existing tenant to extend their lease (correct)

What should an investor do if a risk can't be mitigated prior to buying a property?

Understand the risk, measure the potential impact, and price it into their investment (correct)

Seek government assistance to mitigate the risk

Delay the investment until the risk can be mitigated

Ignore the risk and proceed with the investment

What does using a higher required rate of return result in for the investor?

Paying a lower price for the investment Signup and view all the answers

Why is prioritization key for real estate investors?

Time is limited and there are almost infinite risks to consider Signup and view all the answers

What would happen if all risks were considered equal according to the text?

No investments would ever be made Signup and view all the answers

What is the art of real estate investing according to the text?

Knowing which risks to pay attention to and which to ignore Signup and view all the answers

What is the purpose of sensitivity analysis in real estate investment?

To measure the impact of incremental changes in assumptions in a cash flow model Signup and view all the answers

Why are entitlements crucial for investors when purchasing land in real estate investment?

They determine the land's development rights and potential uses Signup and view all the answers

What do investors prioritize when evaluating risks in real estate investment?

Risks that can potentially impact the returns of an investment Signup and view all the answers

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.