CMPS Investor Return on Investment 4

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?

Accepted Answer

Property B offers a higher income return relative to its price

Answer

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?

Accepted Answer

It increases the return above the unleveraged cap rate

Answer

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?

Accepted Answer

Opportunity cost analysis comparing mortgage rate to investment yield

Answer

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?

Accepted Answer

Longer hold periods with appreciation and principal paydown

Answer

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?

Accepted Answer

5.1%

Answer

Actual NOI = projected NOI × 0.85; actual cap rate = (projected cap rate × 0.85) = 6% × 0.85 = 5.1%.

(CMPS) Certified Mortgage Planning Specialist Practice Test

(CMPS) Certified Mortgage Planning Specialist Practice Test

CMPS Investor Return on Investment 4