Real Estate Investing Risk Assessment and Mitigation 2

Question 1

What does a 'stress test' on a real estate investment typically evaluate?

Accepted Answer

Whether cash flow remains positive under adverse scenarios like vacancy spikes or rate increases

Answer

Stress testing models downside scenarios—higher vacancies, rising rates, or falling rents—to see if the investment still survives financially.

Question 2

Which metric best captures the risk that a property's income won't cover its debt payments?

Accepted Answer

Debt Service Coverage Ratio (DSCR)

Answer

DSCR divides net operating income by total debt service; a ratio below 1.0 means the property cannot cover its loan payments.

Question 3

An investor holds a property in a city where one employer provides 40% of local jobs. This is an example of which type of risk?

Accepted Answer

Economic concentration risk

Answer

Economic concentration risk arises when a single employer, industry, or tenant dominates a local economy, making property values highly sensitive to that entity's fortunes.

Question 4

What is the primary purpose of purchasing landlord insurance in addition to a standard homeowner's policy?

Accepted Answer

To insure rental income loss and liability specific to investment properties

Answer

Landlord insurance covers loss of rental income, property damage, and landlord liability—risks not fully addressed by standard homeowner policies.

Question 5

Which approach helps mitigate the risk of overpaying for a property in a hot market?

Accepted Answer

Anchoring the offer to comparable sales data and projected NOI rather than asking price

Answer

Basing offers on objective comps and income projections protects against emotional bidding and market euphoria that inflates prices beyond intrinsic value.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Risk Assessment and Mitigation 2