Risk Assessment and Mitigation 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 Risk Assessment and Mitigation flashcards as text
What does a 'stress test' on a real estate investment typically evaluate?
Answer: Whether cash flow remains positive under adverse scenarios like vacancy spikes or rate increases
Stress testing models downside scenarios—higher vacancies, rising rates, or falling rents—to see if the investment still survives financially.
Which metric best captures the risk that a property's income won't cover its debt payments?
Answer: Debt Service Coverage Ratio (DSCR)
DSCR divides net operating income by total debt service; a ratio below 1.0 means the property cannot cover its loan payments.
An investor holds a property in a city where one employer provides 40% of local jobs. This is an example of which type of risk?
Answer: Economic concentration risk
Economic concentration risk arises when a single employer, industry, or tenant dominates a local economy, making property values highly sensitive to that entity's fortunes.
What is the primary purpose of purchasing landlord insurance in addition to a standard homeowner's policy?
Answer: To insure rental income loss and liability specific to investment properties
Landlord insurance covers loss of rental income, property damage, and landlord liability—risks not fully addressed by standard homeowner policies.
Which approach helps mitigate the risk of overpaying for a property in a hot market?
Answer: Anchoring the offer to comparable sales data and projected NOI rather than asking price
Basing offers on objective comps and income projections protects against emotional bidding and market euphoria that inflates prices beyond intrinsic value.
A real estate investor requires a minimum 8% cash-on-cash return before purchasing. This is best described as:
Answer: A return threshold used as a risk filter
Setting a minimum cash-on-cash return acts as a disciplined risk filter, ensuring the deal compensates the investor adequately for capital deployed.
Which environmental hazard, commonly found in older US properties, requires disclosure and remediation and can significantly impact investment value?
Answer: Lead-based paint in properties built before 1978
Federal law requires disclosure of known lead-based paint hazards in housing built before 1978, and remediation costs can materially reduce returns.