Real Estate Investing Investment Property Analysis 3 — Questions and Answers
Question 1: An investor uses the 50% rule to quickly estimate operating expenses on a rental. If gross rents are $2,000/month, what does the rule estimate for monthly expenses?
- $1,000 (Correct answer)
- $600
- $800
- $1,200
Correct answer: $1,000
The 50% rule assumes operating expenses (excluding mortgage) equal roughly 50% of gross rents, or $1,000 here.
Question 2: Vacancy and credit loss in property analysis represents:
- Income lost due to empty units or non-paying tenants (Correct answer)
- Depreciation of the building structure
- The cost of capital improvements
- Property tax assessments
Correct answer: Income lost due to empty units or non-paying tenants
Vacancy and credit loss is subtracted from potential gross income to arrive at effective gross income.
Question 3: What is the primary purpose of a proforma in real estate investment analysis?
- To project future income, expenses, and returns for a property (Correct answer)
- To document the current lease agreements
- To calculate the property's assessed tax value
- To record historical sales prices in the neighborhood
Correct answer: To project future income, expenses, and returns for a property
A proforma is a forward-looking financial model used to evaluate a property's expected performance over a holding period.
Question 4: A single-family rental has a purchase price of $250,000 and annual gross rent of $20,000. What is the GRM?
- 12.5 (Correct answer)
- 8
- 10
- 15
Correct answer: 12.5
GRM = $250,000 ÷ $20,000 = 12.5.
Question 5: Which approach to value is most commonly used by appraisers for income-producing properties?
- Income approach (Correct answer)
- Sales comparison approach
- Cost approach
- Replacement value approach
Correct answer: Income approach
The income approach values property based on its income-generating potential using cap rate or discounted cash flow analysis.
Question 6: If a property's effective gross income is $48,000 and operating expenses are $20,000, what is the operating expense ratio (OER)?
- 41.7% (Correct answer)
- 58.3%
- 24%
- 33%
Correct answer: 41.7%
OER = Operating Expenses ÷ Effective Gross Income = $20,000 ÷ $48,000 ≈ 41.7%.
Question 7: When comparing two similar rental properties, a lower cap rate in the same market typically implies:
- A higher purchase price relative to income (Correct answer)
- Better cash flow for the investor
- Higher risk associated with the property
- More favorable financing terms
Correct answer: A higher purchase price relative to income
A lower cap rate means the investor is paying more per dollar of NOI, usually reflecting higher demand or perceived lower risk.
Real Estate Investing Investment Property Analysis 3
An investor uses the 50% rule to quickly estimate operating expenses on a rental.
If gross rents are $2,000/month, what does the rule estimate for monthly expenses?