Investment Property Financing 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 Financing flashcards as text
What is the purpose of a 'preferred equity' structure in a real estate syndication?
Answer: It provides investors a fixed priority return before common equity receives profits
Preferred equity holders receive a set return (e.g., 8%) before common equity investors participate in profits, offering more protection but less upside.
How does a construction-to-permanent loan benefit an investor building a rental property?
Answer: It rolls the construction loan into a permanent mortgage at project completion in one closing
A construction-to-permanent loan converts automatically from a short-term construction facility to a long-term mortgage upon project completion, saving the cost and hassle of two separate closings.
What does a 'prepayment penalty' on an investment property loan protect?
Answer: The lender against loss of expected interest income when a loan is paid off early
Prepayment penalties compensate lenders for the lost interest income when a borrower pays off a loan before its maturity date.
An investor's rental property has a NOI of $36,000 and an annual debt service of $28,000. What is the DSCR?
Answer: 1.29
DSCR = NOI ÷ Debt Service = $36,000 ÷ $28,000 = 1.286, rounded to 1.29, indicating the property generates about 29% more income than needed to cover the debt.
Which risk does a variable-rate HELOC used to fund investment property purchases expose the investor to?
Answer: Rate increases that raise the cost of capital and reduce cash flow
Because HELOCs carry variable rates, rising interest rates can increase monthly costs, squeezing the investment property's cash flow or making the deal unprofitable.
In the BRRRR strategy, the second 'R' stands for Rent. What does the final 'R' (Repeat) require from a financing standpoint?
Answer: Using the cash-out refinance proceeds to fund the next acquisition
The 'Repeat' step requires successfully completing a cash-out refinance to pull capital back out of the stabilized property and deploy it into the next investment.
A lender requires an investor to personally guarantee a commercial real estate loan. This is known as a:
Answer: Recourse guarantee
A recourse guarantee means the lender can pursue the borrower's personal assets beyond the collateral property if the loan defaults.