Investment (Property) 2

Question 1

What does the term 'leverage' mean in real estate investing?

Accepted Answer

Using borrowed money to increase potential return

Answer

Leverage uses borrowed capital, such as a mortgage, to amplify potential returns on invested equity.

Question 2

Which metric measures annual rental income relative to property purchase price?

Accepted Answer

Gross rental yield

Answer

Gross rental yield divides annual rent by purchase price to show income return.

Question 3

What is a capitalization rate (cap rate) used to evaluate?

Accepted Answer

A property's rate of return based on net operating income

Answer

Cap rate equals net operating income divided by property value, indicating return independent of financing.

Question 4

Which expense is typically NOT included in net operating income calculations?

Accepted Answer

Mortgage principal and interest payments

Answer

NOI excludes debt service, so mortgage payments are not subtracted when calculating it.

Question 5

What does a 1031 exchange allow a U.S. real estate investor to do?

Accepted Answer

Defer capital gains taxes by reinvesting in a like-kind property

Answer

A 1031 exchange defers capital gains tax when proceeds are reinvested into a like-kind property.

Investment Practice Test