Investment Analysis and Portfolio Strategy Flashcards

Which metric measures the annual return on a commercial property relative to its purchase price, excluding financing?

Answer: Capitalization rate

The capitalization rate (cap rate) is calculated as NOI divided by purchase price and reflects unlevered return.

An investor purchases a property for $2,000,000 with an NOI of $140,000. What is the cap rate?

Answer: 7.0%

$140,000 / $2,000,000 = 0.07 or 7.0% cap rate.

What does a Debt Service Coverage Ratio (DSCR) of 1.25 indicate?

Answer: The property generates 25% more income than required to cover debt

A DSCR of 1.25 means the property's NOI is 1.25 times its annual debt service, providing a 25% buffer.

Which investment strategy involves purchasing underperforming or vacant commercial properties to reposition and increase their value?

Answer: Value-add strategy

The value-add strategy targets properties needing physical improvements or leasing efforts to boost NOI and resale value.

In commercial real estate portfolio diversification, which type of diversification involves investing across office, retail, industrial, and multifamily properties?

Answer: Property type diversification

Property type diversification spreads risk across different asset classes that may respond differently to economic cycles.

What is the primary purpose of a sensitivity analysis in commercial real estate investment underwriting?

Answer: To assess how changes in key assumptions affect investment returns

Sensitivity analysis tests how variations in vacancy, rent growth, or exit cap rate impact projected returns to quantify risk.

Which measure represents the discount rate at which the net present value of all cash flows from a commercial real estate investment equals zero?

Answer: Internal rate of return

The IRR is the discount rate that makes NPV equal to zero, accounting for the timing and magnitude of all cash flows.