Investment Analysis and Financial Concepts Flashcards

What is a 1031 exchange and what is its primary benefit for real estate investors?

Answer: A tax-deferral strategy allowing investors to defer capital gains by reinvesting in a like-kind property

A 1031 exchange allows investors to defer capital gains taxes by rolling proceeds from a sold investment property into a qualifying replacement property of equal or greater value.

What is the debt-to-income ratio (DTI) and why does it matter to residential investors?

Answer: The ratio of monthly debt payments to gross monthly income, used by lenders to qualify buyers

DTI is a key underwriting metric: lenders use it to determine how much additional debt a borrower can safely carry based on their income.

What does LTV (Loan-to-Value ratio) indicate in a mortgage context?

Answer: The percentage of the property's value that is financed by the mortgage

LTV = Loan Amount / Appraised Value; a lower LTV means more equity, which reduces lender risk and can result in better interest rates and no PMI.

What is the primary risk of negative amortization in an adjustable-rate mortgage?

Answer: The loan balance can increase over time because payments don't cover all accrued interest

Negative amortization occurs when minimum payments are less than interest due, causing unpaid interest to be added to the principal, increasing the total debt owed.

For investment property, what is typically the minimum down payment required by conventional lenders in the US?

Answer: 15%–25% depending on the number of units

Conventional lenders typically require 15% down for single-family investment properties and up to 25% for multi-unit (2-4 unit) investment properties.

What is a gross rent multiplier (GRM) and how is it used?

Answer: A quick valuation metric calculated by dividing a property's price by its annual gross rental income

GRM = Purchase Price / Annual Gross Rent; it's a fast screening tool to compare investment properties, though it doesn't account for expenses.