Investment (Property) 3 — Questions and Answers
Question 1: What is the loan-to-value (LTV) ratio?
- The loan amount divided by the property's appraised value (Correct answer)
- The rent divided by the purchase price
- The down payment divided by income
- The interest divided by principal
Correct answer: The loan amount divided by the property's appraised value
LTV compares the loan size to the property value, indicating lender risk.
Question 2: Why is real estate often considered a hedge against inflation?
- Property values and rents tend to rise with inflation (Correct answer)
- Property taxes never increase
- Mortgages get cheaper over time
- Rents are fixed by law
Correct answer: Property values and rents tend to rise with inflation
As prices rise, property values and rental income typically increase, preserving purchasing power.
Question 3: What is depreciation in the context of investment property taxes?
- A deduction reflecting the building's wear over time (Correct answer)
- A penalty for selling early
- The loss of rental tenants
- A decline in neighborhood quality
Correct answer: A deduction reflecting the building's wear over time
Depreciation lets investors deduct the cost of the building over its useful life, lowering taxable income.
Question 4: What does 'house hacking' typically involve?
- Living in one unit while renting out others to offset costs (Correct answer)
- Flipping homes within 30 days
- Investing only in foreclosures
- Buying property in cash overseas
Correct answer: Living in one unit while renting out others to offset costs
House hacking means occupying part of a multi-unit property while renting the rest to cover the mortgage.
Question 5: Which factor most directly affects a property's rental demand?
- Location and proximity to jobs and amenities (Correct answer)
- The color of the front door
- The seller's personal history
- The property's listing photographer
Correct answer: Location and proximity to jobs and amenities
Location, jobs, schools, and amenities drive tenant demand more than cosmetic factors.
Question 6: What is a 'fix-and-flip' strategy?
- Buying, renovating, and quickly reselling for profit (Correct answer)
- Holding rentals for decades
- Buying land and leaving it vacant
- Refinancing repeatedly without selling
Correct answer: Buying, renovating, and quickly reselling for profit
Fix-and-flip involves purchasing a property, improving it, and selling it quickly for a gain.
Question 7: What does PMI (private mortgage insurance) protect?
- The lender if the borrower defaults (Correct answer)
- The tenant's deposit
- The property against fire
- The buyer's credit score
Correct answer: The lender if the borrower defaults
PMI protects the lender, usually required when the down payment is below 20%.
Investment (Property) 3
What is the loan-to-value (LTV) ratio?