REM Investment Analysis and Valuation

Question 1

What does the capitalization rate (cap rate) measure in real estate investment?

Accepted Answer

The ratio of a property's net operating income to its current market value

Answer

The total mortgage interest paid over the life of a loan

Answer

The percentage of gross rents collected after vacancy losses

Answer

The annual appreciation rate of a property's market value

Question 2

How is Net Operating Income (NOI) calculated?

Accepted Answer

Effective Gross Income minus Operating Expenses

Answer

Gross Potential Rent minus Vacancy and Credit Losses only

Answer

Total Revenue minus Mortgage Payments and Operating Expenses

Answer

Gross Scheduled Income minus Capital Expenditures

Question 3

What is the Gross Rent Multiplier (GRM)?

Accepted Answer

A property's sale price divided by its annual gross scheduled rent

Answer

Annual NOI divided by total operating expenses

Answer

Monthly rent multiplied by the vacancy rate

Answer

A property's value divided by its cap rate

Question 4

What does the cash-on-cash return measure?

Accepted Answer

Annual pre-tax cash flow divided by the total cash invested

Answer

Net operating income divided by the purchase price

Answer

Total profit upon sale divided by holding period in years

Answer

Annual mortgage payments divided by property value

Question 5

What is the primary purpose of a pro forma in real estate investment analysis?

Accepted Answer

To project future income, expenses, and returns for a property

Answer

To document historical financial performance for tax purposes

Answer

To establish the property's current market value for sale

Answer

To calculate the depreciation schedule for accounting

Question 6

What is the Debt Coverage Ratio (DCR) and what minimum value do most lenders require?

Accepted Answer

NOI divided by annual debt service; most lenders require at least 1.20–1.25

Answer

Annual revenue divided by total liabilities; lenders require at least 2.0

Answer

Net income divided by interest payments; lenders require at least 1.50

Answer

Cash flow divided by equity invested; lenders require at least 1.10

Question 7

Which valuation approach estimates a property's value based on the income it generates?

Accepted Answer

Income Approach

Answer

Sales Comparison Approach

Answer

Cost Approach

Answer

Replacement Value Approach