Real Estate Investing Real Estate Financing Strategies 4 β Questions and Answers
Question 1: What is a wraparound mortgage?
- A new mortgage that encompasses an existing mortgage, with the seller collecting payments and continuing to pay the original loan (Correct answer)
- A loan that wraps a property's title into a trust for estate planning
- A second mortgage taken out after a first mortgage is paid off
- A government loan that wraps multiple county tax liens into one payment
Correct answer: A new mortgage that encompasses an existing mortgage, with the seller collecting payments and continuing to pay the original loan
In a wraparound mortgage, the seller creates a new, larger mortgage at a higher interest rate that 'wraps around' the existing underlying loan, keeping the spread as profit.
Question 2: Which financing strategy allows an investor to use funds from a self-directed IRA to purchase real estate?
- Self-directed IRA real estate investing (Correct answer)
- Roth conversion real estate strategy
- 1031 exchange via IRA funds
- HELOC-to-IRA bridge technique
Correct answer: Self-directed IRA real estate investing
A self-directed IRA can hold real estate as an asset, allowing investors to grow rental income and appreciation tax-deferred or tax-free within the account.
Question 3: What is the purpose of a 1031 exchange in real estate?
- To defer capital gains taxes by reinvesting sale proceeds into a like-kind property (Correct answer)
- To exchange one type of mortgage for another without triggering fees
- To swap property titles between two investors tax-free permanently
- To convert a rental property to a primary residence with no tax consequences
Correct answer: To defer capital gains taxes by reinvesting sale proceeds into a like-kind property
A 1031 exchange (named after IRS Code Section 1031) lets investors defer capital gains taxes when they sell a property and reinvest the proceeds into a like-kind property.
Question 4: In a 1031 exchange, what is the deadline to identify a replacement property after selling the relinquished property?
- 45 days (Correct answer)
- 30 days
- 90 days
- 180 days
Correct answer: 45 days
IRS rules require investors to identify potential replacement properties within 45 days of closing on the relinquished property.
Question 5: What is a portfolio loan and who typically offers them?
- A non-conforming loan kept on the lender's own books rather than sold to Fannie Mae or Freddie Mac, typically offered by community banks or credit unions (Correct answer)
- A loan used exclusively for buying REITs and real estate mutual funds
- A government-insured product for investors with five or more properties
- A Fannie Mae product allowing up to 20 financed properties
Correct answer: A non-conforming loan kept on the lender's own books rather than sold to Fannie Mae or Freddie Mac, typically offered by community banks or credit unions
Portfolio lenders keep loans in-house rather than selling them on the secondary market, giving them flexibility to underwrite non-standard deals.
Question 6: What is an adjustable-rate mortgage (ARM) and what risk does it pose to real estate investors?
- A mortgage with an interest rate that changes periodically after an initial fixed period, posing the risk of higher payments if rates rise (Correct answer)
- A mortgage tied to property tax assessments, risking higher payments in appreciating markets
- A variable-rate loan with no cap on how low the rate can go, risking negative amortization
- A flexible-term loan that adjusts monthly payment amounts based on rental income
Correct answer: A mortgage with an interest rate that changes periodically after an initial fixed period, posing the risk of higher payments if rates rise
ARMs offer a lower initial rate but can increase significantly after the fixed period ends, potentially making cash flow negative if rents don't keep pace.
Question 7: What is 'private money lending' in real estate investing?
- Borrowing from individual private investors rather than banks or institutional hard money lenders (Correct answer)
- A confidential lending program offered by major banks to high-net-worth investors
- Lending money from a private LLC to a publicly traded REIT
- A type of shadow banking using offshore accounts
Correct answer: Borrowing from individual private investors rather than banks or institutional hard money lenders
Private money lenders are individuals (often friends, family, or wealthy contacts) who lend personal capital to real estate investors, typically with flexible, negotiated terms.
Real Estate Investing Real Estate Financing Strategies 4
What is a wraparound mortgage?