CMPS Investor Return on Investment 2

Question 1

An investor purchases a rental property for $300,000 with $60,000 down. Annual NOI is $24,000. What is the cash-on-cash return?

Accepted Answer

8%

Answer

Cash-on-cash return = annual pre-tax cash flow / total cash invested; $24,000 / $300,000 is not correct — the cash flow must be calculated after debt service, but if NOI equals cash flow here: $24,000 / $60,000 = 40% is the raw ratio; however standard CoC uses actual cash invested ($60,000) vs. after-debt cash flow, so more context is needed, but given NOI as cash flow: $24,000 / $60,000 = 40%.

Question 2

Which metric best measures a property's profitability independent of financing?

Accepted Answer

Capitalization rate

Answer

The capitalization rate (NOI / property value) evaluates a property's income potential without regard to how it is financed.

Question 3

A property's NOI increases from $20,000 to $22,000 while the cap rate remains at 8%. What happens to the property value?

Accepted Answer

Increases by $25,000

Answer

Value = NOI / cap rate; new value = $22,000 / 0.08 = $275,000 vs. old $250,000, an increase of $25,000.

Question 4

What does a Debt Service Coverage Ratio (DSCR) of 1.0 indicate?

Accepted Answer

NOI exactly covers annual debt service with no surplus

Answer

A DSCR of 1.0 means NOI equals annual debt service exactly, leaving no cash flow cushion for the investor.

Question 5

An investor's equity grows from $80,000 to $112,000 over three years. What is the approximate annualized return on equity?

Accepted Answer

11.9%

Answer

Annualized return = (112,000/80,000)^(1/3) - 1 = 1.40^0.333 - 1 ≈ 11.87%, approximately 11.9%.

(CMPS) Certified Mortgage Planning Specialist Practice Test

(CMPS) Certified Mortgage Planning Specialist Practice Test

CMPS Investor Return on Investment 2