Investment Analysis and Financial Concepts Flashcards

What is the cap rate used for in residential investment property analysis?

Answer: To measure the property's income-generating potential independent of financing

Capitalization rate (Cap Rate = NOI / Property Value) allows investors to compare income-producing properties on an apples-to-apples basis, regardless of how they are financed.

What is the difference between gross rental income and net operating income (NOI)?

Answer: NOI subtracts operating expenses (but not debt service) from gross income

NOI equals gross rental income minus all operating expenses (taxes, insurance, maintenance, management), but excludes mortgage payments (debt service).

What does 'cash-on-cash return' measure for a real estate investor?

Answer: The annual pre-tax cash flow divided by the total cash invested

Cash-on-cash return measures the annual cash yield on the actual cash invested (down payment + closing costs), making it useful for comparing leveraged investments.

In the context of residential real estate investment, what does the '1% rule' suggest?

Answer: Monthly gross rental income should be at least 1% of the purchase price

The 1% rule is a quick screening tool: if monthly rent is at least 1% of the purchase price, the property may generate positive cash flow (though full analysis is always required).

What is leverage in real estate investment and why is it significant?

Answer: Using debt financing to purchase a property, amplifying both potential gains and losses

Leverage uses borrowed funds to control a larger asset than cash alone would allow, multiplying returns on equity but also increasing risk if values decline.

What is the primary tax advantage of real estate investment through depreciation?

Answer: It allows investors to deduct a portion of the building's value each year, reducing taxable income

Depreciation allows residential rental property to be written off over 27.5 years under the IRS schedule, creating a paper loss that offsets rental income.