Real Estate Investing Real Estate Financing Methods 3 β Questions and Answers
Question 1: What is a mezzanine loan in real estate financing?
- A first-position mortgage on residential property
- A subordinate loan often secured by equity interests rather than the property itself (Correct answer)
- A government-backed loan for low-income buyers
- A fixed-rate loan with no prepayment penalty
Correct answer: A subordinate loan often secured by equity interests rather than the property itself
Mezzanine loans are subordinate debt instruments often secured by equity interests in the owning entity rather than a direct lien on the real estate.
Question 2: Which financing strategy involves buying a property using a short-term loan and then replacing it with permanent financing?
- Wraparound mortgage
- Bridge financing (Correct answer)
- Seller financing
- Hard money permanent loan
Correct answer: Bridge financing
Bridge financing provides short-term capital to acquire or renovate a property until permanent long-term financing can be secured.
Question 3: An investor uses a '70% rule' in fix-and-flip financing. What does this guide?
- Maximum LTV ratio for permanent loans
- Maximum offer price as a percentage of ARV minus repair costs (Correct answer)
- Minimum down payment percentage required
- Maximum debt-to-income ratio allowed by lenders
Correct answer: Maximum offer price as a percentage of ARV minus repair costs
The 70% rule states an investor should pay no more than 70% of the after-repair value (ARV) minus estimated repair costs.
Question 4: What is a wraparound mortgage?
- A loan that includes both purchase price and renovation costs
- A new mortgage that encompasses an existing mortgage, with the seller collecting payments (Correct answer)
- A mortgage that wraps around multiple properties
- A government program wrapping private loans into securities
Correct answer: A new mortgage that encompasses an existing mortgage, with the seller collecting payments
A wraparound mortgage is a junior loan that includes and 'wraps around' the existing senior mortgage, with the seller continuing to pay the underlying loan.
Question 5: In real estate syndication, what does the 'preferred return' represent?
- The sponsor's management fee
- A minimum return paid to passive investors before profits are split (Correct answer)
- The interest rate on the senior loan
- The expected appreciation rate of the property
Correct answer: A minimum return paid to passive investors before profits are split
The preferred return is a threshold return paid to passive investors (limited partners) before the sponsor (general partner) receives any profit share.
Question 6: What distinguishes a recourse loan from a non-recourse loan in commercial real estate?
- Recourse loans have lower interest rates
- With recourse loans, the lender can pursue the borrower's personal assets if the property doesn't cover the debt (Correct answer)
- Non-recourse loans require larger down payments
- Recourse loans are only available for residential properties
Correct answer: With recourse loans, the lender can pursue the borrower's personal assets if the property doesn't cover the debt
With a recourse loan, the lender can go after the borrower's personal assets beyond the property if the loan defaults; non-recourse limits recovery to the property.
Question 7: What is a 'points' in the context of a real estate loan?
- A credit score threshold required by lenders
- An upfront fee equal to 1% of the loan amount (Correct answer)
- The number of properties in a portfolio loan
- A penalty assessed for late mortgage payments
Correct answer: An upfront fee equal to 1% of the loan amount
One point equals 1% of the loan amount, paid upfront to the lender either to reduce the interest rate (discount points) or as an origination fee.
Real Estate Investing Real Estate Financing Methods 3
What is a mezzanine loan in real estate financing?