Real Estate Investment Planning Flashcards

An investor purchases a rental property for $350,000 with a $70,000 down payment. The annual NOI is $28,000. What is the cap rate?

Answer: 8.0%

Cap rate = NOI / Purchase Price = $28,000 / $350,000 = 8.0%.

Which depreciation schedule does the IRS require residential rental property to use?

Answer: 27.5-year straight-line

Residential rental property is depreciated over 27.5 years using the straight-line method under MACRS.

A property with a gross potential rent of $60,000, vacancy loss of $3,000, and operating expenses of $22,000 has a NOI of:

Answer: $35,000

NOI = Gross Potential Rent − Vacancy − Operating Expenses = $60,000 − $3,000 − $22,000 = $35,000.

Which of the following best describes a 1031 exchange in real estate investing?

Answer: Deferral of capital gains tax by reinvesting proceeds into a like-kind property

A 1031 exchange allows investors to defer capital gains taxes by rolling proceeds into a like-kind replacement property.

An investor's property generates $18,000 annual cash flow on a $150,000 equity investment. What is the cash-on-cash return?

Answer: 12%

Cash-on-cash return = Annual Pre-Tax Cash Flow / Total Cash Invested = $18,000 / $150,000 = 12%.

Which ratio measures a property's ability to cover its mortgage payments from operating income?

Answer: Debt Service Coverage Ratio (DSCR)

DSCR = NOI / Annual Debt Service; lenders typically require a minimum DSCR of 1.20–1.25 for investment properties.

Which type of real estate investment structure provides pass-through taxation and limited liability to its investors?

Answer: Limited Liability Company (LLC)

An LLC offers pass-through taxation avoiding double taxation while providing limited liability protection to members.