Real Estate Investing Investment Property Analysis 4

Question 1

An investor runs a discounted cash flow (DCF) analysis on a rental property. What does a positive Net Present Value (NPV) indicate?

Accepted Answer

The investment generates returns above the required discount rate

Answer

A positive NPV means the present value of all future cash flows exceeds the initial investment at the chosen discount rate.

Question 2

Which of the following best describes the Internal Rate of Return (IRR) for an investment property?

Accepted Answer

The discount rate at which the NPV of all cash flows equals zero

Answer

IRR is the annualized effective compounded return rate that makes NPV equal to zero across the entire holding period.

Question 3

A property is purchased for $500,000, generates $40,000 NOI, and is sold for $600,000 five years later. Which analysis accounts for ALL of these cash flows together?

Accepted Answer

Discounted cash flow (DCF) analysis

Answer

DCF incorporates periodic operating cash flows AND the reversion (sale proceeds) to calculate total investment return.

Question 4

The break-even ratio (BER) for a rental property is calculated as:

Accepted Answer

(Operating Expenses + Debt Service) ÷ Gross Potential Rent

Answer

BER shows what occupancy rate is needed to cover all expenses and debt service; lenders typically want BER below 85%.

Question 5

Depreciation in U.S. real estate investing is best described as:

Accepted Answer

A non-cash tax deduction that reduces taxable rental income over 27.5 years for residential property

Answer

The IRS allows residential rental property to be depreciated over 27.5 years, reducing taxable income without actual cash outlay.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Investment Property Analysis 4