CRECI Investment Analysis and Portfolio Strategy 1 — Questions and Answers
Question 1: Which metric measures the annual return on a commercial property relative to its purchase price, excluding financing?
- Capitalization rate (Correct answer)
- Cash-on-cash return
- Internal rate of return
- Debt service coverage ratio
Correct answer: Capitalization rate
The capitalization rate (cap rate) is calculated as NOI divided by purchase price and reflects unlevered return.
Question 2: An investor purchases a property for $2,000,000 with an NOI of $140,000. What is the cap rate?
- 5.0%
- 6.0%
- 7.0% (Correct answer)
- 8.0%
Correct answer: 7.0%
$140,000 / $2,000,000 = 0.07 or 7.0% cap rate.
Question 3: What does a Debt Service Coverage Ratio (DSCR) of 1.25 indicate?
- The property generates 25% less income than debt payments
- The property generates 25% more income than required to cover debt (Correct answer)
- The loan-to-value ratio is 125%
- The vacancy rate is 25%
Correct 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.
Question 4: Which investment strategy involves purchasing underperforming or vacant commercial properties to reposition and increase their value?
- Core strategy
- Core-plus strategy
- Value-add strategy (Correct answer)
- Opportunistic strategy
Correct answer: Value-add strategy
The value-add strategy targets properties needing physical improvements or leasing efforts to boost NOI and resale value.
Question 5: In commercial real estate portfolio diversification, which type of diversification involves investing across office, retail, industrial, and multifamily properties?
- Geographic diversification
- Property type diversification (Correct answer)
- Tenant credit diversification
- Vintage year diversification
Correct answer: Property type diversification
Property type diversification spreads risk across different asset classes that may respond differently to economic cycles.
Question 6: What is the primary purpose of a sensitivity analysis in commercial real estate investment underwriting?
- To determine the optimal lease structure
- To assess how changes in key assumptions affect investment returns (Correct answer)
- To calculate depreciation schedules
- To evaluate tenant creditworthiness
Correct 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.
Question 7: Which measure represents the discount rate at which the net present value of all cash flows from a commercial real estate investment equals zero?
- Equity dividend rate
- Capitalization rate
- Internal rate of return (Correct answer)
- Gross rent multiplier
Correct 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.
CRECI Investment Analysis and Portfolio Strategy 1
Which metric measures the annual return on a commercial property relative to its purchase price, excluding financing?