Real Estate Investing Practice Test 4 β Questions and Answers
Question 1: What is 'amortization' in the context of a real estate mortgage?
- The annual increase in a property's market value
- The gradual repayment of a loan through scheduled principal and interest payments (Correct answer)
- A penalty charged when a borrower pays off a mortgage early
- The process of depreciating a building's value for tax purposes
Correct answer: The gradual repayment of a loan through scheduled principal and interest payments
Amortization is the process of paying off a mortgage over time through regular installments that cover both interest and principal.
Question 2: A property generates $50,000 NOI and is purchased for $625,000. What is the cap rate?
- 12.5%
- 8% (Correct answer)
- 6.25%
- 4%
Correct answer: 8%
Cap Rate = NOI Γ· Purchase Price = $50,000 Γ· $625,000 = 0.08 = 8%.
Question 3: Which type of real estate lease requires the tenant to pay base rent plus a portion of property taxes, insurance, and maintenance?
- Gross lease
- Net lease (Correct answer)
- Percentage lease
- Modified gross lease
Correct answer: Net lease
A net lease passes some or all operating expenses (taxes, insurance, maintenance) to the tenant in addition to base rent, reducing the landlord's cost exposure.
Question 4: What does 'loan-to-value ratio' (LTV) measure?
- The ratio of annual rental income to the loan amount
- The percentage of a property's value financed by a mortgage (Correct answer)
- The number of years required to pay off a loan
- The interest rate charged relative to the property's value
Correct answer: The percentage of a property's value financed by a mortgage
LTV = Loan Amount Γ· Appraised Property Value Γ 100; lenders use it to assess risk on a mortgage.
Question 5: What is 'wholesaling' in real estate investing?
- Buying properties in bulk at a discount from developers
- Contracting to purchase a property then assigning that contract to another buyer for a fee (Correct answer)
- Purchasing distressed properties and renting them at below-market rates
- Negotiating bulk discounts on renovation materials
Correct answer: Contracting to purchase a property then assigning that contract to another buyer for a fee
A wholesaler gets a property under contract at a discount, then sells (assigns) that contract to an end buyer before closing, profiting from the spread.
Question 6: What is 'depreciation recapture' in real estate?
- The process of claiming additional depreciation after selling a property at a loss
- The IRS taxation of previously claimed depreciation deductions when a property is sold at a gain (Correct answer)
- A method for recovering renovation costs through accelerated depreciation
- The automatic cancellation of depreciation deductions when a property is refinanced
Correct answer: The IRS taxation of previously claimed depreciation deductions when a property is sold at a gain
When you sell a property for a gain, the IRS 'recaptures' prior depreciation deductions and taxes them at up to 25%, separate from the standard capital gains rate.
Question 7: Which metric measures how many years of gross rent it would take to pay back a property's purchase price?
- Debt service coverage ratio (DSCR)
- Gross rent multiplier (GRM) (Correct answer)
- Internal rate of return (IRR)
- Price-to-earnings ratio (P/E)
Correct answer: Gross rent multiplier (GRM)
The Gross Rent Multiplier (GRM) is calculated as Purchase Price Γ· Annual Gross Rent and expresses payback period in years.
Real Estate Investing Practice Test 4
What is 'amortization' in the context of a real estate mortgage?