CMPS Real Estate Investment Planning 3 — Questions and Answers
Question 1: A real estate investor comparing two markets focuses on population growth, job creation, and rental demand. These are examples of:
- Market fundamentals (Correct answer)
- Cap rate compression factors
- Debt service variables
- Underwriting assumptions
Correct answer: Market fundamentals
Population growth, employment trends, and rental demand are core market fundamentals used in real estate investment analysis.
Question 2: An investor buys a property at a 5% cap rate in a market where comparable properties trade at a 6% cap rate. This suggests the investor:
- Overpaid relative to market (Correct answer)
- Received a discount
- Found a value-add opportunity
- Used incorrect NOI calculations
Correct answer: Overpaid relative to market
Buying at a lower cap rate than market implies paying a premium because a lower cap rate means a higher price for the same income.
Question 3: Which risk describes the possibility that a real estate investor cannot sell a property quickly at fair market value?
- Liquidity risk (Correct answer)
- Interest rate risk
- Credit risk
- Inflation risk
Correct answer: Liquidity risk
Liquidity risk is the danger that real estate cannot be quickly converted to cash without a significant price concession.
Question 4: In a mortgage planning context, which loan feature most benefits a real estate investor holding a property for only 5 years?
- 5/1 ARM with lower initial rate (Correct answer)
- 30-year fixed rate mortgage
- 15-year fully amortizing loan
- Balloon payment in 10 years
Correct answer: 5/1 ARM with lower initial rate
A 5/1 ARM offers a lower rate for the initial fixed period matching the holding period, minimizing carry cost before the planned sale.
Question 5: Which of the following is a characteristic of commercial real estate loans compared to residential investment loans?
- Underwriting is primarily based on property income rather than borrower income (Correct answer)
- They typically have 30-year fully amortizing terms
- They are regulated under the Truth in Lending Act (TILA)
- They require PMI when LTV exceeds 80%
Correct answer: Underwriting is primarily based on property income rather than borrower income
Commercial loans are underwritten primarily on the property's NOI and DSCR rather than the borrower's personal income.
Question 6: An investor uses borrowed funds to amplify potential returns on a real estate investment. This strategy is known as:
- Leverage (Correct answer)
- Arbitrage
- Hedging
- Diversification
Correct answer: Leverage
Leverage involves using debt to increase the potential return on equity, though it also magnifies losses.
Question 7: Which metric best represents the total return from a real estate investment including both income and appreciation over the holding period?
- Internal Rate of Return (IRR) (Correct answer)
- Gross Rent Multiplier (GRM)
- Cap Rate
- Cash-on-Cash Return
Correct answer: Internal Rate of Return (IRR)
IRR accounts for the timing and magnitude of all cash flows including purchase, operating income, and eventual sale proceeds.
CMPS Real Estate Investment Planning 3
A real estate investor comparing two markets focuses on population growth, job creation, and rental demand.
These are examples of: