Financial Analysis for Properties Flashcards

A property has an NOI of $95,000 and comparable properties sell at a 6.5% cap rate. What is the indicated property value?

Answer: $1,461,538

Value = NOI ÷ Cap Rate = $95,000 ÷ 0.065 = $1,461,538.

Which financial metric is most useful when comparing the operating efficiency of two properties with different sizes?

Answer: Operating expense ratio

The operating expense ratio (expenses ÷ EGI) is a percentage that allows meaningful comparison regardless of property size.

A residential manager is reviewing a rent roll. What key information does a rent roll provide?

Answer: A listing of all units, current rents, lease terms, and occupancy status

A rent roll is a snapshot document showing each unit, tenant, current rent, lease dates, and payment status.

What does a negative net present value (NPV) indicate for a proposed property investment?

Answer: The investment does not meet the investor's required rate of return

A negative NPV means the present value of future cash flows is less than the investment cost, failing to meet the required return.

Which of the following best describes the concept of leverage in real estate investment?

Answer: Using borrowed funds to increase potential return on equity

Leverage uses mortgage financing so that a smaller equity investment can control a larger asset, amplifying potential returns (and risks).

A manager is asked to calculate the effective gross income multiplier (EGIM) for a property that sold for $1,500,000 with an EGI of $150,000. What is the EGIM?

Answer: 10

EGIM = Sale Price ÷ Effective Gross Income = $1,500,000 ÷ $150,000 = 10.

When preparing a property operating budget, which approach builds estimates from scratch by justifying every expense item without reference to prior-year figures?

Answer: Zero-based budgeting

Zero-based budgeting requires justification for every line item from zero rather than adjusting the prior year's budget.