Real Estate Investing Real Estate Investing Practice Test 2

Question 1

What does the debt service coverage ratio (DSCR) measure in real estate investing?

Accepted Answer

The ratio of net operating income to total debt payments

Answer

DSCR measures whether a property's net operating income is sufficient to cover its debt obligations.

Question 2

In a 1031 exchange, what is the maximum timeframe to identify replacement properties after selling the relinquished property?

Accepted Answer

45 days

Answer

The IRS requires that replacement properties be identified within 45 days of selling the relinquished property.

Question 3

Which of the following best describes a value-add real estate investment strategy?

Accepted Answer

Acquiring underperforming properties and improving them to increase value

Answer

Value-add investing involves purchasing properties with improvement potential and executing renovations or management changes to boost income and value.

Question 4

What is the primary risk associated with using a high loan-to-value (LTV) ratio when financing an investment property?

Accepted Answer

Greater vulnerability to negative equity if property values decline

Answer

A high LTV ratio means less equity cushion, making the investor more susceptible to owing more than the property is worth if values drop.

Question 5

Which metric accounts for vacancy losses, operating expenses, and debt service to show the actual cash returned to an investor?

Accepted Answer

Cash-on-cash return

Answer

Cash-on-cash return divides annual pre-tax cash flow by total cash invested, reflecting the actual yield after all operating costs and debt payments.