CMPS Investor Return on Investment 3

Question 1

An investor uses a 1031 exchange. How does this strategy enhance ROI?

Accepted Answer

It defers capital gains taxes, allowing full proceeds to be reinvested

Answer

A 1031 exchange defers — not eliminates — capital gains taxes, letting investors redeploy the full sale proceeds into a new property to compound returns.

Question 2

What is the primary purpose of calculating Internal Rate of Return (IRR) for a real estate investment?

Accepted Answer

To measure the discount rate at which NPV equals zero across the entire hold period

Answer

IRR is the discount rate that makes the net present value of all cash flows (including sale proceeds) equal to zero, reflecting the true time-value-adjusted return.

Question 3

An investor's property has a gross rent multiplier (GRM) of 10 and annual gross rents of $30,000. What is the estimated property value?

Accepted Answer

$300,000

Answer

Property value using GRM = Gross Rents × GRM = $30,000 × 10 = $300,000.

Question 4

Which concept describes the return an investor sacrifices by choosing one investment over the next best alternative?

Accepted Answer

Opportunity cost

Answer

Opportunity cost is the foregone return from the best alternative investment not chosen, a key factor in evaluating ROI.

Question 5

Depreciation on a residential rental property is taken over how many years under current U.S. tax law?

Accepted Answer

27.5 years

Answer

The IRS requires residential rental property to be depreciated using straight-line method over 27.5 years.

(CMPS) Certified Mortgage Planning Specialist Practice Test

(CMPS) Certified Mortgage Planning Specialist Practice Test

CMPS Investor Return on Investment 3