REA Financial Modeling & Investment Analysis 2 — Questions and Answers
Question 1: An investor purchases a property for $2,000,000 with an NOI of $160,000. What is the going-in cap rate?
- 6.0%
- 7.5%
- 8.0% (Correct answer)
- 9.0%
Correct answer: 8.0%
Cap rate = NOI / Purchase Price = $160,000 / $2,000,000 = 8.0%.
Question 2: In a discounted cash flow (DCF) model, which discount rate is most commonly used for real estate equity analysis?
- WACC
- Risk-free rate
- Equity IRR hurdle rate (Correct answer)
- Cap rate
Correct answer: Equity IRR hurdle rate
Equity investors typically use their target IRR hurdle rate as the discount rate in an equity DCF.
Question 3: What does a negative equity multiple indicate in a real estate investment?
- The investment generated losses greater than the equity invested (Correct answer)
- The investment returned less than 1x equity
- The IRR is below the hurdle rate
- The property was sold below purchase price
Correct answer: The investment generated losses greater than the equity invested
A negative equity multiple means cumulative cash distributions are negative, implying losses exceeding total equity invested.
Question 4: Which sensitivity analysis best captures the combined effect of occupancy and rent changes on property value?
- Tornado chart
- Two-variable data table (Correct answer)
- Monte Carlo simulation
- Waterfall analysis
Correct answer: Two-variable data table
A two-variable data table simultaneously shows outcomes across ranges of two inputs, such as occupancy and rent.
Question 5: A property has an EGI of $500,000 and operating expenses of $200,000. What is the operating expense ratio (OER)?
- 30%
- 40% (Correct answer)
- 50%
- 60%
Correct answer: 40%
OER = Operating Expenses / EGI = $200,000 / $500,000 = 40%.
Question 6: In a real estate pro forma, 'above-the-line' deductions typically refer to expenses deducted from:
- Net sale proceeds
- Potential gross income to arrive at EGI
- EGI to arrive at NOI (Correct answer)
- NOI to arrive at cash flow before tax
Correct answer: EGI to arrive at NOI
Above-the-line deductions are operating expenses subtracted from EGI to calculate NOI.
Question 7: An analyst uses a 5-year hold period and projects a reversion cap rate 50 bps higher than the going-in cap rate. This assumption reflects:
- Depreciation of the asset over time
- Expected market rent growth
- Increased risk as the asset ages (Correct answer)
- Lower leverage at exit
Correct answer: Increased risk as the asset ages
A higher exit cap rate assumes greater perceived risk or older asset quality at disposition, reducing terminal value.
REA Financial Modeling & Investment Analysis 2
An investor purchases a property for $2,000,000 with an NOI of $160,000.
What is the going-in cap rate?