Real Estate Finance Practice Questions PDF

**1. Capitalization is the process used to:**\ A) Establish reproduction cost\ B) Establish mortgage payments\ C) Establish a depreciation schedule\ D) Convert income into an estimate of value\ **Answer: D**\ **Explanation:** Capitalization is used in the income approach to convert net operating inc...

**1. Capitalization is the process used to:**\ A) Establish reproduction cost\ B) Establish mortgage payments\ C) Establish a depreciation schedule\ D) Convert income into an estimate of value\ **Answer: D**\ **Explanation:** Capitalization is used in the income approach to convert net operating income (NOI) into an estimate of value by dividing it by the capitalization rate. **2. A loan secured by real property featuring an interest rate that is constant for the term of the loan is referred to as a(an):**\ A) Adjustable-rate mortgage\ B) Fixed-rate mortgage\ C) Constant amortization mortgage\ D) Non-adjustable-rate mortgage\ **Answer: B**\ **Explanation:** A fixed-rate mortgage has a constant interest rate throughout its term, providing consistent payment amounts. **3. The underlying principle providing the basis of the income capitalization approach is:**\ A) Change\ B) Balance\ C) Conformity\ D) Anticipation\ **Answer: D**\ **Explanation:** The principle of anticipation reflects the expectation of future benefits, which forms the foundation of the income capitalization approach. **4. The basic equation used in the income approach to value is:**\ A) Rate + Income = Value\ B) Income ÷ Rate = Value\ C) Rate × Income = Value\ D) Income + Rate = Value\ **Answer: B**\ **Explanation:** The equation **Value = Income ÷ Rate** is fundamental in the income approach, linking the net operating income (NOI) with the capitalization rate to determine property value. Would you like additional questions or further refinements? 4o **You said:** KEEP SAME FORMAT FOR NEXT QUESTIONS **ChatGPT said:** ChatGPT Here's the continuation of the questions in the requested format: **5. A gross lease requires that, in addition to the rent, the tenant must pay:**\ A) Insurance and taxes\ B) Maintenance and utilities only\ C) Maintenance, utilities, insurance, and taxes\ D) None of the above\ **Answer: D**\ **Explanation:** In a gross lease, the landlord is responsible for all operating expenses, and the tenant only pays the agreed-upon rent amount. **6. When market rent exceeds contract rent, the difference is known as:**\ A) Leased fee income\ B) Deficit rent\ C) Economic income\ D) Sandwich interest income\ **Answer: B**\ **Explanation:** **Deficit rent** occurs when the market rent is higher than the contract rent, representing a loss in potential income for the landlord. **7. The rental income that a property would most probably command in the open market is called:**\ A) Net rent\ B) Gross rent\ C) Market rent\ D) Contract rent\ **Answer: C**\ **Explanation:** **Market rent** is the estimated amount a property would achieve in an open market based on comparable rentals. **8. The anticipated income from all operations of the property adjusted for vacancy and collection losses and miscellaneous income is called:**\ A) Pre-tax income\ B) Net operating income\ C) Potential gross income\ D) Effective gross income\ **Answer: D**\ **Explanation:** Effective gross income (EGI) represents the potential gross income minus vacancy and collection losses, plus any additional income. **9. If an income property has an annual effective gross income of \$64,000 with total expenses of \$30,000 and variable expenses of \$17,000, what is the operating expense ratio?**\ A) 0.47\ B) 0.27\ C) 0.73\ D) 2.13\ **Answer: A**\ **Explanation:** The operating expense ratio is calculated as total expenses divided by effective gross income: 30,000÷64,000=0.4730,000 ÷ 64,000 = 0.4730,000÷64,000=0.47. **10. In reconstructing an income statement for an apartment complex, you estimate that the potential gross income is \$500,000. The vacancy and collection loss allowance is 6 percent. If operating expenses are \$205,000, what is the operating expense ratio (rounded)?**\ A) 41%\ B) 44%\ C) 45%\ D) Operating expense ratio cannot be determined without knowing the amount of the mortgage payment.\ **Answer: B**\ **Explanation:** 1. Calculate Effective Gross Income (EGI):\ 500,000×0.06=30,000500,000 × 0.06 = 30,000500,000×0.06=30,000 (vacancy loss)\ 500,000−30,000=470,000500,000 - 30,000 = 470,000500,000−30,000=470,000 (EGI). 2. Operating Expense Ratio = 205,000÷470,000=44%205,000 ÷ 470,000 = 44\\%205,000÷470,000=44%. **11. The subject is an office building which contains 30,000 square feet of gross building area, and 24,000 square feet of net rentable area. The market rent for similar space is \$15.00 per square foot of net rentable area. Vacancy and collection losses are 3% of potential gross income. Operating expenses are 32% of effective gross income, and the sales price was \$2,793,600. What is the potential gross income?**\ A) \$349,200\ B) \$360,000\ C) \$436,500\ D) \$450,000\ **Answer: B**\ **Explanation:** The potential gross income is calculated as 24,000 sq. ft.×15 per sq. ft.=360,00024,000 \\, \\text{sq. ft.} × 15 \\, \\text{per sq. ft.} = 360,00024,000sq. ft.×15per sq. ft.=360,000. **12. The subject is an office building which contains 30,000 square feet of gross building area, and 24,000 square feet of net rentable area. The market rent for similar space is \$15.00 per square foot of net rentable area. Vacancy and collection losses are 3% of potential gross income. Operating expenses are 32% of effective gross income, and the sales price was \$2,793,600. What is the effective gross income?**\ A) \$349,200\ B) \$360,000\ C) \$370,800\ D) \$436,500\ **Answer: A**\ **Explanation:**\ Vacancy and collection loss = 360,000×0.03=10,800360,000 × 0.03 = 10,800360,000×0.03=10,800.\ Effective gross income = 360,000−10,800=349,200360,000 - 10,800 = 349,200360,000−10,800=349,200. **13. The subject is an office building which contains 30,000 square feet of gross building area, and 24,000 square feet of net rentable area. The market rent for similar space is \$15.00 per square foot of net rentable area. Vacancy and collection losses are 3% of potential gross income. Operating expenses are 32% of effective gross income, and the sales price was \$2,793,600. What is the net operating income?**\ A) \$115,200\ B) \$139,680\ C) \$237,456\ D) \$306,000\ **Answer: C**\ **Explanation:**\ Operating expenses = 349,200×0.32=111,744349,200 × 0.32 = 111,744349,200×0.32=111,744.\ Net operating income = 349,200−111,744=237,456349,200 - 111,744 = 237,456349,200−111,744=237,456. **14. The subject is an office building which contains 30,000 square feet of gross building area, and 24,000 square feet of net rentable area. The market rent for similar space is \$15.00 per square foot of net rentable area. Vacancy and collection losses are 3% of potential gross income. Operating expenses are 32% of effective gross income, and the sales price was \$2,793,600. What is the overall capitalization rate (Ro)?**\ A) 0.085\ B) 0.110\ C) 0.105\ D) 0.075\ **Answer: A**\ **Explanation:**\ Overall capitalization rate = NOI÷Sales Price=237,456÷2,793,600=0.085\\text{NOI} ÷ \\text{Sales Price} = 237,456 ÷ 2,793,600 = 0.085NOI÷Sales Price=237,456÷2,793,600=0.085. **15. A property has a net operating income of \$10,000, interest payments of \$8,000, and principal payments of \$1,000. What is the debt coverage ratio?**\ A) 0.09\ B) 0.10\ C) 1.11\ D) 0.08\ **Answer: C**\ **Explanation:**\ Debt coverage ratio = NOI÷(Interest Payments+Principal Payments)=10,000÷(8,000+1,000)=1.11\\text{NOI} ÷ (\\text{Interest Payments} + \\text{Principal Payments}) = 10,000 ÷ (8,000 + 1,000) = 1.11NOI÷(Interest Payments+Principal Payments)=10,000÷(8,000+1,000)=1.11. **16. Given the following information: Building capitalization rate: 0.11; Land capitalization rate: 0.09; Land value as a percent of total value: 35%. What is the overall capitalization rate by using the band-of-investment method?**\ A) 0.097\ B) 0.100\ C) 0.103\ D) 0.110\ **Answer: C**\ **Explanation:** Overall capitalization rate (Ro)=(Land value percentage×Land cap rate)+(Building value percentage×Building cap rate)\\text{Overall capitalization rate (Ro)} = (\\text{Land value percentage} × \\text{Land cap rate}) + (\\text{Building value percentage} × \\text{Building cap rate}) Overall capitalization rate (Ro)=(Land value percentage×Land cap rate)+(Building value percentage×Building cap rate) Ro=(0.35×0.09)+(0.65×0.11)=0.0315+0.0715=0.103Ro = (0.35 × 0.09) + (0.65 × 0.11) = 0.0315 + 0.0715 = 0.103Ro=(0.35×0.09)+(0.65×0.11)=0.0315+0.0715=0.103 **17. An apartment house is valued at \$420,000 and has a net income of \$2,800 per month. Calculate the overall capitalization rate for the investment.**\ A) 6.67%\ B) 7.52%\ C) 8.00%\ D) 12.50%\ **Answer: C**\ **Explanation:**\ Convert monthly income to annual income: 2,800×12=33,6002,800 × 12 = 33,6002,800×12=33,600.\ Overall capitalization rate Ro=NOI÷Value=33,600÷420,000=0.08Ro = \\text{NOI} ÷ \\text{Value} = 33,600 ÷ 420,000 = 0.08Ro=NOI÷Value=33,600÷420,000=0.08 or 8%. **18. The lease base rent less rent concessions is called:**\ A) Effective rent\ B) Contract rent\ C) Deficit rent\ D) Market rent\ **Answer: A**\ **Explanation:** Effective rent accounts for the actual rent paid after adjusting for concessions or incentives offered to the tenant. **19. The rate that is the percentage that annual real estate taxes are in relation to the property's total value is:**\ A) Effective tax rate\ B) After-tax rate\ C) Recapture rate\ D) Nominal interest rate\ **Answer: A**\ **Explanation:** The effective tax rate expresses the annual property tax as a percentage of the property's total value. **20. The ratio of net operating income to effective gross income is called:**\ A) Land capitalization rate\ B) Net income ratio\ C) Operating expense ratio\ D) Effective gross income ratio\ **Answer: B**\ **Explanation:** The net income ratio is calculated as NOI÷Effective Gross Income\\text{NOI} ÷ \\text{Effective Gross Income}NOI÷Effective Gross Income, indicating the proportion of income remaining after operating expenses. **21. The mortgage capitalization rate (RM) is the ratio between the payments of principal and interest on a mortgage to the original amount borrowed and is expressed:**\ A) Monthly\ B) Annually\ C) Quarterly\ D) By the lender\ **Answer: B**\ **Explanation:** The mortgage capitalization rate is typically expressed annually for standardization and ease of comparison. **22. What is the overall capitalization rate (Ro) from the following information developed from sales comparables in the area of the subject property?\ Potential gross income: \$1,545,000; Operating expenses: \$543,068; Vacancy and collection loss rate: 5%; Effective gross income multiplier: 7.0.**\ A) 0.08\ B) 0.09\ C) 0.10\ D) 0.11\ **Answer: B**\ **Explanation:** Effective Gross Income=PGI×(1−Vacancy and Collection Loss Rate)=1,545,000×0.95=1,467,750\\text{Effective Gross Income} = \\text{PGI} × (1 - \\text{Vacancy and Collection Loss Rate}) = 1,545,000 × 0.95 = 1,467,750 Effective Gross Income=PGI×(1−Vacancy and Collection Loss Rate)=1,545,000×0.95=1,467,750 Net Income Ratio (NIR)=1−(Operating Expenses÷EGI)=1−(543,068÷1,467,750)=0.63\\text{Net Income Ratio (NIR)} = 1 - (\\text{Operating Expenses} ÷ \\text{EGI}) = 1 - (543,068 ÷ 1,467,750) = 0.63 Net Income Ratio (NIR)=1−(Operating Expenses÷EGI)=1−(543,068÷1,467,750)=0.63 Ro=NIR÷EGIM=0.63÷7.0=0.09Ro = \\text{NIR} ÷ \\text{EGIM} = 0.63 ÷ 7.0 = 0.09Ro=NIR÷EGIM=0.63÷7.0=0.09 **23. You have determined that typical properties, like the subject you are appraising, are financed with 60% debt and 40% equity. Typical financing terms for this type of property require 8% of the amount borrowed be paid annually to amortize the loan, and the typical equity dividend rate (RE) is 0.11 for the equity investor. The effective tax rate for the jurisdiction is 2%. From this information, develop the overall capitalization rate (Ro).**\ A) 0.107\ B) 0.085\ C) 0.112\ D) 0.130\ **Answer: C**\ **Explanation:** Ro=(Debt Percentage×Mortgage Constant)+(Equity Percentage×Equity Dividend Rate)+Effective Tax RateRo = (\\text{Debt Percentage} × \\text{Mortgage Constant}) + (\\text{Equity Percentage} × \\text{Equity Dividend Rate}) + \\text{Effective Tax Rate} Ro=(Debt Percentage×Mortgage Constant)+(Equity Percentage×Equity Dividend Rate)+Effective Tax Rate Ro=(0.60×0.08)+(0.40×0.11)+0.02=0.048+0.044+0.02=0.112Ro = (0.60 × 0.08) + (0.40 × 0.11) + 0.02 = 0.048 + 0.044 + 0.02 = 0.112Ro=(0.60×0.08)+(0.40×0.11)+0.02=0.048+0.044+0.02=0.112 **24. A written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent is:**\ A) Lease\ B) Mortgage\ C) Contract\ D) Rent\ **Answer: A**\ **Explanation:** A lease is the legal document defining the agreement between the owner (lessor) and the tenant (lessee) for the use of a property. **25. The debt coverage ratio requirement from mortgage lenders is 1.5. Lenders will finance 80% of the investment and require a mortgage annual constant of 11.5%. What would be the indicated overall capitalization rate (Ro) for the subject commercial property?**\ A) 10.6%\ B) 15.2%\ C) 12.5%\ D) 13.8%\ **Answer: D**\ **Explanation:** The formula to calculate the overall capitalization rate (Ro) is: Ro=Debt Coverage Ratio (DCR)×Mortgage Constant (RM)×Mortgage Percentage (M)Ro = Substitute the values: Ro=1.5×0.115×0.80=0.138 or 13.8%. Ro = 1.5 × 0.115 × 0.80 = 0.138 This shows the proportion of income needed to cover the mortgage obligations, reflecting the lender's expectations for the investment