CRM Financial Analysis for Properties 2 — Questions and Answers
Question 1: A property generates $180,000 in effective gross income and has $72,000 in operating expenses. What is the net operating income (NOI)?
- $108,000 (Correct answer)
- $252,000
- $72,000
- $180,000
Correct answer: $108,000
NOI equals effective gross income minus total operating expenses: $180,000 - $72,000 = $108,000.
Question 2: Which ratio compares a property's NOI to its total debt service to assess loan repayment capacity?
- Debt coverage ratio (Correct answer)
- Loan-to-value ratio
- Capitalization rate
- Break-even ratio
Correct answer: Debt coverage ratio
The debt coverage ratio (DCR) divides NOI by annual debt service to show how well income covers mortgage payments.
Question 3: A property's potential gross income is $220,000, vacancy and credit losses total $11,000, and other income is $5,000. What is the effective gross income?
- $214,000 (Correct answer)
- $209,000
- $225,000
- $220,000
Correct answer: $214,000
EGI = Potential Gross Income - Vacancy/Credit Losses + Other Income: $220,000 - $11,000 + $5,000 = $214,000.
Question 4: In a discounted cash flow (DCF) analysis, what does the discount rate represent?
- The investor's required rate of return (Correct answer)
- The property's capitalization rate
- The mortgage interest rate
- The inflation-adjusted appreciation rate
Correct answer: The investor's required rate of return
The discount rate reflects the investor's required rate of return, used to convert future cash flows to present value.
Question 5: If a property's break-even ratio is 85%, what does this indicate?
- 85% of gross income is needed to cover operating expenses and debt service (Correct answer)
- The property has a 15% cap rate
- Vacancy must stay below 85% to remain profitable
- Operating expenses equal 85% of NOI
Correct answer: 85% of gross income is needed to cover operating expenses and debt service
The break-even ratio shows the percentage of gross income required to cover all operating costs and debt service.
Question 6: Which depreciation method is most commonly used for residential income property under current U.S. tax law?
- Straight-line over 27.5 years (Correct answer)
- Accelerated over 15 years
- Double-declining balance over 39 years
- Sum-of-years-digits over 30 years
Correct answer: Straight-line over 27.5 years
The IRS requires residential rental property to be depreciated using straight-line depreciation over 27.5 years.
Question 7: A manager is preparing an annual budget and projects a 3% rent increase across all units. This technique is best described as:
- Trend analysis budgeting (Correct answer)
- Zero-based budgeting
- Capital reserves budgeting
- Cash flow budgeting
Correct answer: Trend analysis budgeting
Trend analysis budgeting uses historical data and projected percentage changes to forecast future income and expenses.
CRM Financial Analysis for Properties 2
A property generates $180,000 in effective gross income and has $72,000 in operating expenses.
What is the net operating income (NOI)?