CRS Investment Analysis and Financial Concepts

Question 1

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

Accepted Answer

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

Answer

To determine the maximum loan amount a buyer qualifies for

Answer

To calculate the seller's capital gains tax liability

Answer

To compare the property's age to neighborhood averages

Question 2

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

Accepted Answer

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

Answer

They are the same figure used interchangeably

Answer

Gross income deducts mortgage payments; NOI does not

Answer

NOI includes depreciation; gross income does not

Question 3

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

Accepted Answer

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

Answer

The total return including appreciation over a 10-year hold period

Answer

The ratio of rent to property value

Answer

The investor's net worth growth from a property

Question 4

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

Accepted Answer

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

Answer

Vacancy rates should not exceed 1% annually

Answer

Property taxes should not exceed 1% of assessed value

Answer

Agent commission should not exceed 1% on investment properties

Question 5

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

Accepted Answer

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

Answer

The agent's ability to negotiate a lower price

Answer

The process of refinancing multiple investment properties simultaneously

Answer

The legal authority to manage a property on behalf of an investor

Question 6

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

Accepted Answer

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

Answer

It eliminates all capital gains taxes when the property is sold

Answer

It provides a dollar-for-dollar credit against the investor's tax bill

Answer

It exempts rental income from federal income tax entirely