CMPS Investor Return on Investment 4 — Questions and Answers
Question 1: An investor compares two properties: Property A has a 7% cap rate and Property B has a 9% cap rate. Which is generally true?
- Property A is in a riskier market
- Property B offers a higher income return relative to its price (Correct answer)
- Property A generates more cash flow
- Property B is worth more
Correct answer: Property B offers a higher income return relative to its price
A higher cap rate means more income relative to purchase price, typically reflecting higher risk or a less desirable location.
Question 2: What effect does positive leverage have on an investor's cash-on-cash return?
- It reduces the return below the cap rate
- It increases the return above the unleveraged cap rate (Correct answer)
- It has no effect on cash-on-cash return
- It eliminates vacancy risk
Correct answer: It increases the return above the unleveraged cap rate
Positive leverage occurs when the return on the investment exceeds the loan's interest rate, boosting cash-on-cash return above the cap rate.
Question 3: A client wants to evaluate the return from paying down their mortgage early versus investing extra cash elsewhere. Which metric is most relevant?
- Gross rent multiplier
- Opportunity cost analysis comparing mortgage rate to investment yield (Correct answer)
- Debt service coverage ratio
- Break-even ratio
Correct answer: Opportunity cost analysis comparing mortgage rate to investment yield
Comparing the guaranteed mortgage interest savings (cost of debt) to the expected investment yield reveals whether paying down debt or investing offers a superior return.
Question 4: Which factor directly increases an investor's equity multiple on a real estate holding?
- Increasing the loan-to-value ratio only
- Longer hold periods with appreciation and principal paydown (Correct answer)
- Choosing interest-only financing permanently
- Lower vacancy rates alone
Correct answer: Longer hold periods with appreciation and principal paydown
Equity multiple = total distributions / equity invested; longer holds allow more appreciation and mortgage paydown to accumulate, growing the multiple.
Question 5: An investor's pro forma shows a 6% cap rate but actual NOI falls 15% short of projections. What is the actual cap rate?
- 5.1% (Correct answer)
- 6.9%
- 4.8%
- 6.6%
Correct answer: 5.1%
Actual NOI = projected NOI × 0.85; actual cap rate = (projected cap rate × 0.85) = 6% × 0.85 = 5.1%.
Question 6: When using a mortgage to acquire investment property, which term describes the ratio of borrowed funds to total property value?
- Debt service coverage ratio
- Loan-to-value ratio (Correct answer)
- Cash-on-cash return
- Equity yield rate
Correct answer: Loan-to-value ratio
Loan-to-value (LTV) ratio = loan amount / property value, expressing how much of the purchase is financed.
Question 7: A property purchased for $400,000 is sold five years later for $520,000 with no mortgage. What is the total ROI from appreciation?
- 13%
- 23%
- 30% (Correct answer)
- 25%
Correct answer: 30%
Total ROI = (sale price - purchase price) / purchase price = $120,000 / $400,000 = 30%.
CMPS Investor Return on Investment 4
An investor compares two properties: Property A has a 7% cap rate and Property B has a 9% cap rate.
Which is generally true?