CMPS Real Estate Investment Planning 5 — Questions and Answers
Question 1: A real estate investor uses a Gross Rent Multiplier (GRM) of 10 and the subject property's gross annual rent is $48,000. The estimated property value is:
- $480,000 (Correct answer)
- $480
- $4,800,000
- $48,000
Correct answer: $480,000
Estimated Value = GRM × Gross Annual Rent = 10 × $48,000 = $480,000.
Question 2: Which due diligence item specifically examines whether tenants have the right to buy the property before it is offered to outside buyers?
- Right of first refusal clause review (Correct answer)
- Environmental Phase I assessment
- Title search
- Zoning compliance review
Correct answer: Right of first refusal clause review
A right of first refusal gives existing tenants the contractual priority to purchase the property before outside buyers can make an offer.
Question 3: An investor's 10-unit apartment building has an asking price of $1,200,000 and NOI of $72,000. A competing property trades at a 7% cap rate. Is the asking price reasonable?
- No, it is overpriced; the market-implied value is $1,028,571 (Correct answer)
- Yes, the implied cap rate of 7% matches market
- No, the implied cap rate of 6% exceeds the market rate
- Yes, because NOI growth will close the gap
Correct answer: No, it is overpriced; the market-implied value is $1,028,571
Market-implied value at 7% cap rate = $72,000 / 0.07 = $1,028,571, which is below the $1,200,000 ask, indicating overpricing.
Question 4: Which exit strategy allows an investor to defer taxes while converting a property into an annuity-like income stream?
- Installment sale (Correct answer)
- 1031 exchange into a DST
- Cash-out refinance
- Short sale
Correct answer: Installment sale
An installment sale spreads capital gains recognition over multiple years as payments are received, deferring the tax liability.
Question 5: A CMPS advising a real estate investor on leverage should caution that higher LTV increases:
- Both financial risk and required cash flow to service debt (Correct answer)
- Tax benefits only, with no added risk
- NOI automatically through appreciation
- The cap rate on the investment
Correct answer: Both financial risk and required cash flow to service debt
Higher leverage means greater debt service obligations and amplified losses if property values decline or vacancies rise.
Question 6: Which analysis tool projects property-level cash flows, equity buildup, and ultimate sale proceeds across a defined holding period?
- Discounted Cash Flow (DCF) model (Correct answer)
- Comparative Market Analysis (CMA)
- Break-even ratio analysis
- Gross rent multiplier calculation
Correct answer: Discounted Cash Flow (DCF) model
A DCF model discounts all projected future cash flows and the reversion (sale) to present value to determine investment value and IRR.
Question 7: When advising a client on purchasing investment real estate, a CMPS should first help the client establish:
- Clear investment goals, risk tolerance, and target holding period (Correct answer)
- The highest leverage possible to maximize returns
- The property type with the highest current cap rate
- A 1031 exchange plan before the purchase is made
Correct answer: Clear investment goals, risk tolerance, and target holding period
Identifying objectives, risk tolerance, and holding period guides all subsequent financing, property selection, and exit strategy decisions.
CMPS Real Estate Investment Planning 5
A real estate investor uses a Gross Rent Multiplier (GRM) of 10 and the subject property's gross annual rent is $48,000.
The estimated property value is: