Real Estate Investment Review Questions - PDF

**1.One of three approaches to value in which the appraiser derives a value indication by converting anticipated benefits through ownership of income-producing property is the \_\_\_\_\_\_\_\_\_\_ approach.** **Answer**: **c) Income Approach**\ **Explanation**: According to the text, the income app...

**1.One of three approaches to value in which the appraiser derives a value indication by converting anticipated benefits through ownership of income-producing property is the \_\_\_\_\_\_\_\_\_\_ approach.** **Answer**: **c) Income Approach**\ **Explanation**: According to the text, the income approach focuses on converting future anticipated benefits (such as income or rent) into a current property value **2.Real estate competes with other investments for the investor\'s dollar. As an** **investor analyzes various opportunities, what will he or she consider?** How much will it cost? How much will I get back? When will I get it back? What are the risks? What is the return of a real estate investment compared to other investments of similar risks? **3.The economic principle of \_\_\_\_\_\_\_\_\_\_ states that value is created by the expectation of benefits to be derived in the future.** **Answer**: **b) Anticipation**\ **Explanation**: The principle of anticipation explains that future benefits create value, forming the foundational basis of the income capitalization approach **4.The economic principle of \_\_\_\_\_\_\_\_\_\_ states that a property\'s maximum value tends to be set by the lowest cost or price at which another property of equivalent utility can be acquired.** a\) Substitution\ b) Competition\ c) Contribution\ d) Anticipation **Answer**: **a) Substitution**\ **Explanation**: Substitution implies that buyers will not pay more for a property if a similar one is available at a lower price 5\. Competition is created by the potential for profits. However, competition among sellers may lead to a/an \_\_\_\_\_\_\_\_\_\_\_\_, which reduces prices and profits. Competition among buyers may lead to \_\_\_\_\_\_\_\_\_\_\_\_, which increases prices and profits to sellers. **a)** Oversupply, Shortage\ **b)** Market saturation, High demand\ **c)** Surplus, Buyer bidding wars\ **d)** Increased production, Scarcity **Answer:** **a) Oversupply, Shortage** **Explanation:**\ **Oversupply** occurs when there are too many sellers competing, reducing prices and profits. On the other hand, **shortage** happens when buyers compete, driving up prices and benefiting sellers​ 6\. The \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ rate reflects the return of the investment in the wasting asset. **a)** Capitalization\ **b)** Yield\ **c)** Recapture\ **d)** Depreciation **Answer:** **c) Recapture** **Explanation:**\ The **recapture rate** represents the portion of a property\'s return allocated to recovering the investment in a wasting asset, such as a building, over its remaining economic life. It accounts for depreciation and the eventual need for asset replacement. It is often calculated as the reciprocal of the remaining economic life (e.g., 1 ÷ 25 years = 0.04 or 4%) 7\. List nine factors influencing investor decisions. **Safety of the investment** **Management** **Liquidity of the investment** **Appreciation** **Size of the investment** **Income tax advantages** **Use as collateral** **Leverage** **Time** 8. \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ leverage is achieved when funds are invested in property, which has a higher rate of return than the cost of borrowed funds. a\) Neutral\ b) Negative\ c) Positive\ d) Zero-balance Answer: **c) Positive** Explanation: Positive leverage occurs when the return from the investment exceeds the cost of the borrowed funds, increasing profitability. 9. Four most common methods of financing real estate are: a\) Cash, Trust Deed, Mortgage, Lease\ b) Mortgage, Trust Deed, Cash, Land Contract\ c) Amortized Mortgage, Reverse Mortgage, Balloon Payment, Lease-to-Own\ d) Mortgage, Promissory Note, Collateralized Bond, Land Purchase Answer: **b) Mortgage, Trust Deed, Cash, Land Contract**\ Explanation: These are the primary ways to finance real estate purchases, with mortgages being the most common. 10. A personal property is termed a \_\_\_\_ mortgage.\ a) Package\ b) Reverse\ c) Chattel\ d) Open-End Answer: **c) Chattel**\ Explanation: A chattel mortgage involves a lien on personal property used as security for a loan 11. A \_\_\_\_\_\_\_ mortgage is also called a second mortgage.\ a) Junior\ b) Package\ c) Straight\ d) Adjustable Answer: **a) Junior**\ Explanation: Junior mortgages are subordinate to first mortgages and are often referred to as second mortgages 12. List four types of mortgages classified according to repayment provisions:\ a) Fixed, Adjustable, Balloon, Flexible\ b) Amortized, Straight, Reverse, Partially Amortized\ c) Package, Collateralized, Straight-Line, Equity-Based\ d) Graduated, Leveraged, Fixed, Deferred Answer: **b) Amortized, Straight, Reverse, Partially Amortized**\ Explanation: These classifications represent repayment structures in real estate financing. **13. A payment on the balance due of a note at the end of the loan term that is in excess of the regular payment amounts is called a \_\_\_\_\_\_\_\_\_\_\_\_ payment.** **a)** Lump-sum\ **b)** Balloon\ **c)** Deferred\ **d)** Amortized **Answer:** **b) Balloon**\ **Explanation:**\ A **balloon payment** is a large, final payment due at the end of a loan term that exceeds prior periodic payments, often used in loans with lower initial payments. **14. A \_\_\_\_\_\_\_\_\_\_\_\_ mortgage covers real estate as well as personal property included with the real estate.** **a)** Blanket\ **b)** Package\ **c)** Chattel\ **d)** Equity **Answer:** **b) Package**\ **Explanation:**\ A **package mortgage** secures a loan for both real estate and personal property, such as furniture or equipment included with the property. **15. The four variables in real estate financing that affect the mortgage payment are:**\ A) Property value, Loan-to-value ratio, Interest rate, Loan duration\ B) Amount borrowed, Interest rate, Term, Frequency of payment\ C) Loan fees, Income, Down payment, Repayment schedule\ D) Principal amount, Mortgage rate, Loan tenure, Payment structure\ **Answer: B**\ **Explanation:** These variables include the **loan amount** (principal borrowed), the **interest rate** applied, the **term** or duration of the loan, and the **frequency** of payments, which directly impact the mortgage payment calculation​ **16. The \_\_\_\_\_\_\_\_\_\_ rate (or discount rate) reflects the return on the investment.**\ A) Cap\ B) Effective tax\ **C) Overall yield**\ D) Operating expense\ **Answer: C**\ **Explanation:** The overall yield rate (or discount rate) indicates the total return an investor expects from a property, accounting for income and the time value of money​. **17. The summation concept is a theoretical procedure in developing the discount rate for a real estate investment and is comprised of the following four parts:**\ A) Inflation adjustment, Liquidity premium, Risk component, Expense factor\ B) Safe rate, Risk rate, Rate for non-liquidity, Rate for management\ C) Capital cost rate, Inflation premium, Risk adjustment, Tax allowance\ D) Liquidity adjustment, Tax factor, Nominal rate, Operating cost rate\ **Answer: B**\ **Explanation:** The summation concept combines the **safe rate** (representing a risk-free return) with adjustments for **risk**, **non-liquidity**, and **management effort** to form a comprehensive discount rate specific to real estate investments​ **18. The \_\_\_\_\_\_\_\_ rate reflects the relationship between the real estate taxes and the value of the property.**\ A) Effective tax\ B) Gross rent\ C) Capitalization\ D) Nominal interest\ **Answer: A**\ **Explanation:** The effective tax rate expresses the ratio of real estate taxes to the overall property value, an essential measure for valuation​ **19. To obtain value using the IRV formula, one must \_\_\_\_\_\_\_ the income by the rate.**\ A) Multiply\ B) Divide\ C) Add\ D) Subtract\ **Answer: B**\ **Explanation:** The IRV formula (Income = Rate × Value) uses division of the income by the rate to calculate the property\'s value **20. To obtain value using the VIF formula, one must \_\_\_\_\_\_\_ the income by the factor.**\ A) Add\ B) Subtract\ C) Multiply\ D) Divide\ **Answer: C**\ **Explanation:** The VIF formula uses multiplication of the income by the factor to derive the value, linking income to property valuation in a straightforward way​. Value = Income × Factor