Real Estate Investing Practice Test 2 β Questions and Answers
Question 1: What is the '1% rule' used for in real estate investing?
- Estimating property tax as 1% of purchase price annually
- Checking if monthly rent is at least 1% of the purchase price (Correct answer)
- Limiting repair costs to 1% of property value per year
- Requiring a 1% down payment for investment properties
Correct answer: Checking if monthly rent is at least 1% of the purchase price
The 1% rule states that monthly rent should equal at least 1% of the purchase price to generate positive cash flow.
Question 2: Which financing method allows an investor to purchase property by taking over the seller's existing mortgage?
- Hard money loan
- Subject-to financing (Correct answer)
- Bridge loan
- Blanket mortgage
Correct answer: Subject-to financing
Subject-to financing means buying a property subject to the existing mortgage, where the seller's loan stays in place but ownership transfers.
Question 3: What does 'equity' in a real estate investment represent?
- The annual rental income from the property
- The total amount owed on the mortgage
- The difference between the property's market value and the outstanding debt (Correct answer)
- The profit earned after selling a property
Correct answer: The difference between the property's market value and the outstanding debt
Equity is the portion of the property's value the owner actually owns, calculated as market value minus all liens and mortgages.
Question 4: An investor buys a duplex for $300,000 and receives $1,800/month in total rent. What is the gross rent multiplier (GRM)?
- 13.9 (Correct answer)
- 166.7
- 6.0
- 5.5
Correct answer: 13.9
GRM = Purchase Price Γ· Annual Gross Rent = $300,000 Γ· ($1,800 Γ 12) = $300,000 Γ· $21,600 β 13.9.
Question 5: What is 'negative gearing' in real estate investing?
- When a property's rental income exceeds all expenses
- When an investor borrows more than the property is worth
- When rental income is less than the property's expenses, resulting in a net loss (Correct answer)
- When a property is sold for less than its purchase price
Correct answer: When rental income is less than the property's expenses, resulting in a net loss
Negative gearing occurs when the costs of owning and financing a property exceed the rental income it generates.
Question 6: Which of the following best describes a 'turnkey' investment property?
- A property requiring significant renovation before it can be rented
- A fully renovated, rent-ready property often sold with a tenant already in place (Correct answer)
- A property purchased at auction below market value
- A commercial property converted to residential use
Correct answer: A fully renovated, rent-ready property often sold with a tenant already in place
A turnkey property is move-in ready, often already generating rental income, requiring minimal work from the investor.
Question 7: What is the primary purpose of a 'title search' when purchasing an investment property?
- To determine the property's current market value
- To identify any liens, encumbrances, or ownership disputes on the property (Correct answer)
- To assess the structural integrity of the building
- To verify the accuracy of the seller's rental income claims
Correct answer: To identify any liens, encumbrances, or ownership disputes on the property
A title search examines public records to ensure the seller has clear ownership and the property is free of undisclosed liens or legal claims.
Real Estate Investing Practice Test 2
What is the '1% rule' used for in real estate investing?