CPM Asset Management and Investment Analysis 3

Question 1

Which of the following is an example of a capital expenditure (CapEx) rather than an operating expense?

Accepted Answer

Roof replacement

Answer

A roof replacement is a capital expenditure because it extends the useful life of the property asset, while recurring operational costs like landscaping and utilities are operating expenses.

Question 2

A CPM is preparing an annual budget. Which budgeting method starts from zero and requires justification for every expense line item?

Accepted Answer

Zero-based budgeting

Answer

Zero-based budgeting requires justification for every expense from scratch each period rather than using prior year figures as a baseline, promoting critical analysis of all costs.

Question 3

What is the primary advantage of using an Internal Rate of Return (IRR) analysis over a simple cap rate when evaluating a real estate investment?

Accepted Answer

IRR accounts for the timing and magnitude of all cash flows over the entire holding period

Answer

IRR accounts for the time value of money and incorporates all cash flows — including sale proceeds — over the entire investment holding period, making it more comprehensive than a cap rate.

Question 4

When analyzing a property's operating expense ratio (OER), a ratio consistently increasing year over year most likely indicates:

Accepted Answer

Rising expenses relative to income, signaling potential management inefficiency

Answer

A rising OER (Operating Expenses ÷ Effective Gross Income) signals that expenses are growing faster than income, which can indicate deferred maintenance, management inefficiency, or income stagnation.

Question 5

In real estate investment, 'leverage' refers to:

Accepted Answer

Using borrowed capital (debt) to increase the potential return on equity

Answer

Leverage in real estate means using borrowed money (a mortgage) to finance a property purchase, which can amplify returns on the equity invested but also increases risk.

CPM - Certified Property Manager Practice Test

CPM - Certified Property Manager Practice Test

CPM Asset Management and Investment Analysis 3