Lesson 18 Quiz – Real Estate Investment

Conservation of capital refers to

preserving, through low-risk investments, the original amount invested

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increasing the value of the original investment over an amount of time

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investing only in low cost and safe investment entities

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getting conservative advice from your financial planner

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Which of the following statements describes the general rule of investing?

The safer the investment, the slower the gain

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The larger the company, the safer the investment

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The less the cost per share, the safer the investment

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The riskier the investment, the greater the gain

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Which of the following terms is an example of an investment that is considered to be “liquid”?

Real estate investment trust

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IRA

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Cash

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Stocks and mutual funds

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Which of the following may add value to one’s financial investment over a period of time?

Appreciation

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Depreciation

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Liquidity

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Market risk

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Investment risks include

changes in demographics

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changes in the value of money as an exchange medium

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changes in the office staff of the company you have invested in

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changes in federal laws

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Which of the following occurs when an investor is required to add to the investment just to keep it in place?

Increased equity

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Added value

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Positive leverage

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Negative leverage

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Investing in an income-producing property would NOT include which of the following?

A 6-flat in a residential community

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A retail store in a strip mall

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The investor’s primary residence

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An office building in a downtown location

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Investing in real estate is always subject to which of the following risk factor?

Capital gains

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Tax deductions

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Tax law changes

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Liquidity

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Which of the following investment entities can comprise a real estate syndicate?

A general partnership

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An individual

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A private investor

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A sole proprietor

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Taxable income from investment real estate is

total income less expenses and cost of vacancies

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gross income minus depreciation

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gross income minus expenses, deductions and exclusions per tax law

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all rents collected

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Cost recovery, or depreciation, allows the owner of income property to deduct a portion of the value of the property’s improvements from gross income over the life of the asset. The depreciable life of the asset is defined by

tax law

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the age of the property at purchase

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the year built plus the number of years to date

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the age of the property at sale

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Section 1031 (Starker) Exchanges are a way to defer taxes on the sale of investment property. Tax on any gain is deferred until

the property is sold and not exchanged

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any mortgage on the property is paid in full

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owners qualify for regular tax exemptions

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ten years after the 1031 Exchange closing date

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Appreciation is the increase in the value of an asset over time. For residential property, a simple formula to estimate total appreciation is

current value plus or minus the price at the time the property is ultimately sold

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current value minus original purchase price

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original purchase price plus cost of improvements

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total cost of improvements over time of ownership minus current value

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Taxable income is

current market value minus depreciation and expenses for the current tax year

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original purchase price minus any loss on the market value for the current tax year

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net operating income minus all allowable deductions

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gross income minus depreciation

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What is the total appreciation of a property that was purchased ten years ago for $300,000 and has a current market value of $325,000?

325000.0

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300000.0

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25000.0

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350000.0

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The interest on a home equity loan is deductible only if the loan proceeds were used to

pay off credit card debt and/or any outstanding debt on which interest was due

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buy, build or make big improvements to the home that secures the loan

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purchase a second or vacation home

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assist family members with the purchase of a home

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Which of the following is the primary tax benefit available to the owner of a non-income property?

The annual deduction for the full mortgage payment

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The portion of annual mortgage payment that goes to repay the principal

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The depreciation amounts available for non-income properties

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The annual deduction for mortgage interest

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Which of the following expenses would NOT be considered in calculating the adjusted basis of a property for tax purposes?

family room addition

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new driveway

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new living room furniture

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new garage door and opener

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Tax law provides for exclusions for individual and married taxpayers for capital gains purposes. Those exclusion amounts are

individual $250,000; married taxpayer $500,000

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individual $325,000; married taxpayer $750,000

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individual $100,000; married Taxpayer $250,000

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individual $200,000; married Taxpayer $400,000

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Which of the following is required for a capital gains tax exclusion for individuals and married taxpayers?

The taxpayer must own the property for at least one of the last three years prior to the date of sale

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The taxpayer must use the property as a principal residence for at least two years during the five years preceding the date of sale

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The taxpayer must not occupy the property

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The taxpayer must own and occupy the property for a period of 12 months and sell it at a loss from the original purchase price

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Cash flow is defined as

income minus expenses and debt service

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the total sum of all income flowing into the investment

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the total monthly income from the investment offset by 2/3 of the monthly expenses

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the total monthly income from the investment offset by ½ of the monthly expenses

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Taxable income is net operating income minus all allowable deductions. Those allowable deductions include all of the following with the exception of

depreciation

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mortgage interest

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mortgage principal

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utility expenses

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Net operating income (NOI) is defined as

the income remaining after payment of all expenses

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gross income minus expenses before debt service

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gross income minus all debt service and depreciation

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income from rents and tenant portions of payment for utilities and taxes

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A real estate syndicate is defined as

a group of two or more people whose purpose is to invest in real estate to generate income

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a closed group of people who own real estate

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a system whereby real estate investors can exchange information

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similar to an MLS, a compilation of listings that are available for investment

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A Real Estate Mortgage Investment Conduit (REMIC) is

a group of mortgage brokers whose goal is to reach more potential clients

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an office within any of the large banking institutions that focuses only on private mortgage investors

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a form of partnership created to hold a pool of mortgages secured by real property

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a group of potential purchasers of real estate who individually do not qualify for a mortgage

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After-tax cash flow is defined as

pre-tax cash flow minus tax liability

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pre-tax cash flow minus debt service minus depreciation

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NOI minus debt service

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NOI minus tax liability

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Passive investment activities are defined as

those in which the investor does not actively participate

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investment activity that requires the investor to take a role in the management of the company

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investments that require no monitoring, but report activity on an annual basis

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those which have no active investors

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REO, or “real estate owned” is a term used

primarily by lenders to indicate that the property is owned by the bank through foreclosure

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to indicate which properties are owned v. rented

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to indicate that a Realtor ® owns a property

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as a designation that indicates “Real Estate Owner”.

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When contemplating an investment, all of the following are important risk factors to consider EXCEPT

changes in demand

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changes in the value of money

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changes in interest rates

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changes in title

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