Investment Property Analysis Flashcards
7 cards from real Real Estate Investing practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Property Analysis flashcards as text
An investor runs a discounted cash flow (DCF) analysis on a rental property. What does a positive Net Present Value (NPV) indicate?
Answer: The investment generates returns above the required discount rate
A positive NPV means the present value of all future cash flows exceeds the initial investment at the chosen discount rate.
Which of the following best describes the Internal Rate of Return (IRR) for an investment property?
Answer: The discount rate at which the NPV of all cash flows equals zero
IRR is the annualized effective compounded return rate that makes NPV equal to zero across the entire holding period.
A property is purchased for $500,000, generates $40,000 NOI, and is sold for $600,000 five years later. Which analysis accounts for ALL of these cash flows together?
Answer: Discounted cash flow (DCF) analysis
DCF incorporates periodic operating cash flows AND the reversion (sale proceeds) to calculate total investment return.
The break-even ratio (BER) for a rental property is calculated as:
Answer: (Operating Expenses + Debt Service) ÷ Gross Potential Rent
BER shows what occupancy rate is needed to cover all expenses and debt service; lenders typically want BER below 85%.
Depreciation in U.S. real estate investing is best described as:
Answer: A non-cash tax deduction that reduces taxable rental income over 27.5 years for residential property
The IRS allows residential rental property to be depreciated over 27.5 years, reducing taxable income without actual cash outlay.
An investor holds a rental property for 5 years and wants to measure total wealth creation including equity paydown, appreciation, and cash flow. Which metric is most appropriate?
Answer: Total return on investment (ROI) over the holding period
Total ROI captures all wealth-building components across the holding period, not just a single year's income metric.
Equity multiple (EM) in real estate investing is defined as:
Answer: Total distributions received divided by total equity invested
An equity multiple of 2.0x means the investor received $2 for every $1 invested over the life of the deal.