CMPS - Certified Mortgage Planning Specialist Investor Return on Investment Questions and Answers

Question 1

An investor purchases a property for $500,000, making a 20% down payment and incurring $10,000 in closing costs.
The property generates a Net Operating Income (NOI) of $30,000 annually.
The annual debt service on the loan is $22,000.
What is the investor's cash-on-cash return?

Accepted Answer

b) 7.27%

Answer

a) 8.00%

Answer

c) 6.00%

Answer

d) 10.00%

Question 2

An investor is analyzing a property with a capitalization rate of 5.5%. The financing available has a loan constant of 6.2%. Which of the following best describes this scenario?

Accepted Answer

c) Negative leverage

Answer

a) Positive leverage

Answer

b) Neutral leverage

Answer

d) The leverage position cannot be determined

Question 3

Which of the following is a primary limitation of using the Gross Rent Multiplier (GRM) as the sole metric for evaluating an investment property?

Accepted Answer

b) It does not account for the property's operating expenses.

Answer

a) It overemphasizes the effect of property appreciation.

Answer

c) It is only applicable to commercial, not residential, properties.

Answer

d) It is too complex for most investors to calculate.

Question 4

An investor purchased a property several years ago with an initial cash investment of $80,000. This year, the property is projected to produce a pre-tax cash flow of $10,000. Due to loan paydown and market appreciation, the investor's current equity in the property is now $150,000. What is the investor's Return on Equity (ROE) for the current year?

Accepted Answer

c) 6.67%

Answer

a) 12.5%

Answer

b) 15.0%

Answer

d) 8.00%

Question 5

When evaluating a real estate investment's total return over its entire holding period, which metric is superior because it accounts for the time value of money, including all cash inflows and outflows from acquisition to disposition?

Accepted Answer

d) Internal Rate of Return (IRR)

Answer

a) Cash-on-Cash Return

Answer

b) Capitalization Rate

Answer

c) Equity Multiple

Question 6

For a real estate investor, how does the non-cash expense of depreciation (cost recovery) primarily impact their overall after-tax return on investment?

Accepted Answer

c) It creates a tax shield that reduces taxable income, thereby increasing after-tax cash flow.

Answer

a) It directly increases the property's Net Operating Income (NOI).

Answer

b) It guarantees a capital gain upon the sale of the property.

Answer

d) It reduces the annual debt service payments.