Real Estate Investing Asset and Property Management 5 — Questions and Answers
Question 1: A property's effective gross income (EGI) is calculated as:
- Potential gross income minus vacancy and credit losses plus other income (Correct answer)
- Net operating income minus debt service
- Gross rent multiplied by the cap rate
- Total expenses subtracted from net rental income
Correct answer: Potential gross income minus vacancy and credit losses plus other income
EGI = Potential Gross Income − Vacancy & Credit Losses + Other Income (like laundry, parking fees), representing actual expected collections.
Question 2: Which maintenance approach focuses on fixing equipment or systems only after they break down?
- Preventive maintenance
- Predictive maintenance
- Reactive maintenance (Correct answer)
- Deferred maintenance
Correct answer: Reactive maintenance
Reactive maintenance addresses issues only after failure occurs, which can lead to higher repair costs and tenant dissatisfaction compared to proactive approaches.
Question 3: A residential landlord wants to raise rent for a tenant on a fixed-term lease. When can this legally happen?
- At any time with 30 days written notice
- Only at lease renewal when the current lease term ends (Correct answer)
- After providing 60 days notice mid-lease
- Whenever market rents increase significantly
Correct answer: Only at lease renewal when the current lease term ends
A fixed-term lease locks in rent for the duration; increases can only be imposed at renewal unless the lease contains a specific escalation clause.
Question 4: What does 'tenant mix' refer to in the context of commercial real estate management?
- The demographic breakdown of residential tenants in an apartment complex
- The strategic combination of retail or commercial tenants to maximize foot traffic and synergy (Correct answer)
- The ratio of long-term to short-term commercial leases in a portfolio
- The process of mixing tenant security deposits into a single account
Correct answer: The strategic combination of retail or commercial tenants to maximize foot traffic and synergy
Tenant mix in commercial properties is the deliberate selection of complementary businesses (e.g., anchor store plus specialty retailers) to drive traffic and revenue.
Question 5: An investor uses a 1031 exchange after selling a rental property. What is the primary benefit?
- Eliminates the need to pay property taxes on the new property
- Defers capital gains taxes by reinvesting proceeds into a like-kind property (Correct answer)
- Allows the investor to withdraw equity tax-free
- Converts short-term gains to long-term gains automatically
Correct answer: Defers capital gains taxes by reinvesting proceeds into a like-kind property
A 1031 exchange allows investors to defer federal capital gains taxes when they sell a property and reinvest the proceeds into a qualifying like-kind replacement property.
Question 6: Which of the following is a landlord's legal obligation under the implied warranty of habitability?
- Providing luxury amenities such as a gym or pool
- Maintaining safe, sanitary conditions including working plumbing and heat (Correct answer)
- Allowing tenants to sublease to any person they choose
- Covering all tenant utility bills regardless of lease terms
Correct answer: Maintaining safe, sanitary conditions including working plumbing and heat
The implied warranty of habitability requires landlords to maintain rental units in a livable condition with functioning essential systems like heat, plumbing, and structural safety.
Question 7: A property manager is evaluating two vendors for landscaping. Vendor A costs $500/month with a one-year contract; Vendor B costs $600/month with no contract. What is the primary risk of choosing Vendor B?
- Vendor B will likely perform worse due to the lower commitment
- Higher monthly cost and pricing unpredictability without a locked contract (Correct answer)
- Vendor B cannot be terminated if performance is poor
- Vendor A's contract may include hidden cancellation fees
Correct answer: Higher monthly cost and pricing unpredictability without a locked contract
Without a contract, Vendor B can raise prices at any time, making budgeting harder even though the flexibility to switch vendors is a benefit.
Real Estate Investing Asset and Property Management 5
A property's effective gross income (EGI) is calculated as: