Real Estate Investing Real Estate Investing Practice Test 2 — Questions and Answers
Question 1: What does the debt service coverage ratio (DSCR) measure in real estate investing?
- The ratio of net operating income to total debt payments (Correct answer)
- The ratio of gross income to property value
- The ratio of equity to total assets
- The ratio of cash flow to purchase price
Correct answer: The ratio of net operating income to total debt payments
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?
- 45 days (Correct answer)
- 60 days
- 90 days
- 180 days
Correct answer: 45 days
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?
- Purchasing stabilized properties with long-term tenants
- Acquiring underperforming properties and improving them to increase value (Correct answer)
- Investing exclusively in raw land for future development
- Buying properties solely for tax loss harvesting
Correct answer: Acquiring underperforming properties and improving them to increase value
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?
- Lower monthly mortgage payments
- Reduced exposure to market downturns
- Greater vulnerability to negative equity if property values decline (Correct answer)
- Increased tax deductions from mortgage interest
Correct answer: Greater vulnerability to negative equity if property values decline
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?
- Gross rent multiplier
- Capitalization rate
- Cash-on-cash return (Correct answer)
- Internal rate of return
Correct answer: Cash-on-cash return
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.
Question 6: What is the purpose of a rent roll in evaluating a multifamily investment property?
- To calculate the property's insurance premiums
- To provide a detailed listing of all units, tenants, lease terms, and current rents (Correct answer)
- To determine the zoning classification of the property
- To estimate future capital expenditure requirements
Correct answer: To provide a detailed listing of all units, tenants, lease terms, and current rents
A rent roll is a document that itemizes each unit's tenant, lease dates, and rental amounts, giving investors a snapshot of current income.
Real Estate Investing Real Estate Investing Practice Test 2
What does the debt service coverage ratio (DSCR) measure in real estate investing?