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 is 'cap rate expansion' and why is it a risk for real estate investors at exit?
Answer: It means the market demands a higher yield, compressing property values at the time of sale
When cap rates rise (expand), the same NOI translates into a lower property value, meaning an investor who buys at a low cap rate may sell at a loss if the market softens.
Which risk mitigation tactic involves requiring tenants to carry their own renter's insurance?
Answer: Reducing the landlord's exposure to tenant property damage claims and third-party liability lawsuits
Mandatory renter's insurance shifts liability for tenant belongings and some third-party claims to the tenant's own policy, reducing the landlord's exposure.
A multifamily investor uses a clause that allows rent to increase annually with CPI. What risk does this lease provision primarily mitigate?
Answer: Inflation eroding the real value of rental income over time
CPI escalation clauses ensure rents keep pace with inflation, protecting the investor's real income and property value against the purchasing-power erosion of fixed rents.
Which due diligence item reveals whether a property has been cited for building code violations that could require costly corrections?
Answer: Certificate of occupancy history and municipal code violation records
Checking local municipality records for open code violations uncovers hidden repair mandates that must be resolved before or after closing, impacting the investment's cost basis.
What is 'refinancing risk' in real estate investing?
Answer: The risk that a loan coming due cannot be refinanced at favorable terms due to market conditions or property performance
Refinancing risk occurs when a balloon payment comes due but lenders tighten underwriting, rates spike, or the property's income has declined, making refinancing expensive or impossible.
Which practice helps an investor mitigate the risk of relying on a single contractor for all property repairs?
Answer: Building a roster of vetted, competitive contractors to ensure service availability and price checks
A diverse contractor network prevents one contractor's unavailability or price gouging from stalling urgent repairs and inflating maintenance costs.
How does a 'reserve account' specifically reduce investment risk in rental property ownership?
Answer: It provides a cash buffer to cover unexpected repairs or vacancy without disrupting debt service
A dedicated capital reserve—typically $100–$300 per unit per month—ensures surprise expenses like HVAC replacements or major roof repairs don't create financial distress.