Real 4000 test 3 dietz Exam |88
Questions and Answers
Market value - -is the basis for economic transactions
- buyer does not want to pay more than market value of property
- Two Main Methods of Investment Analysis in CRE - -1. single-property RE
investment decisions using a set of widely used ratios & multipliers
2. Many investors also perform multi-year discounted cash flow (DCF)
analyses
- single-property RE investment decisions using a set of widely used ratios &
multipliers are: - -- relatively easy to calculate
- do not explicitly consider cash flows beyond 1st year of the analysis
- Many investors also perform multi-year discounted cash flow (DCF)
analyses. They are: - -Harder to calculate; complex spreadsheets and other
specialized programs commonly used.
- "Equity Dividend Rate"and "Cash-on-Cash Return" are: - -perfectly
synonymous
- operating expenses - -o Keep property operating & competitive
o Do not increase value or extend useful life
o Examples: minor roof repairs, air conditioner servicing, lawn maintenance,
utilities, etc.
- capital expenditures - -o Increases market value of property/extend life
o Examples: roof replacement, air-conditioner replacement, installation of
new landscaping
- Above line - -PGI
− VC
= EGI
− OE
− CAPX Reserve
= NOI
- NOI is - -unlevered
- BTCF is - -levered
- NOI - -the property's expected dividend
, - Projected stream of NOI - -What is the fundamental determinant of value?
- 1. service the mortgage debt and
2. provide investor with an acceptable return on equity - -- NOI must be
sufficient to:
- 1. Limited financial resources/wealth
2. Leverage amplifies equity returns (& risk)
3. Also permits more portfolio diversification - -Why do investors borrow?
- Profitability Ratios - -o Capitalization rate (Ro )
o Equity dividend rate (Cash-on-cash Return)
- Financial risk ratios - -o Operating expense ratio
o Loan-to-value ratio (LTV)
o Debt coverage ratio (DCR)
o Debt yield ratio (DYR)
- Capitalization Rate - -= NOI/acquisition price
- The Higher NOI - -the Higher Price
- The Lower NOI - -the Lower Price
- Cap Rate (%) - -Represents the "capital market"
- The Higher Cap Rate - -the Lower Price
- The Lower Cap Rate - -the Higher Price
- cap rates vary inversely with - -quality, class
- Cap rates vary by - -property type risk
- Equity Dividend Rate (EDR) - -= BTCF / Equity investment
- Equity Dividend Rate - -commonly called cash-on-cash return
- Operating Expense Ratio - -Operating Expenses / Effective Gross Income
- Loan-to-Value Ratio (LTV) - -Mortgage Balance /Acquisition Price
- no greater than 65-75% of acquisition price - -Lenders generally want LTV
of first mortgage loan to be
Questions and Answers
Market value - -is the basis for economic transactions
- buyer does not want to pay more than market value of property
- Two Main Methods of Investment Analysis in CRE - -1. single-property RE
investment decisions using a set of widely used ratios & multipliers
2. Many investors also perform multi-year discounted cash flow (DCF)
analyses
- single-property RE investment decisions using a set of widely used ratios &
multipliers are: - -- relatively easy to calculate
- do not explicitly consider cash flows beyond 1st year of the analysis
- Many investors also perform multi-year discounted cash flow (DCF)
analyses. They are: - -Harder to calculate; complex spreadsheets and other
specialized programs commonly used.
- "Equity Dividend Rate"and "Cash-on-Cash Return" are: - -perfectly
synonymous
- operating expenses - -o Keep property operating & competitive
o Do not increase value or extend useful life
o Examples: minor roof repairs, air conditioner servicing, lawn maintenance,
utilities, etc.
- capital expenditures - -o Increases market value of property/extend life
o Examples: roof replacement, air-conditioner replacement, installation of
new landscaping
- Above line - -PGI
− VC
= EGI
− OE
− CAPX Reserve
= NOI
- NOI is - -unlevered
- BTCF is - -levered
- NOI - -the property's expected dividend
, - Projected stream of NOI - -What is the fundamental determinant of value?
- 1. service the mortgage debt and
2. provide investor with an acceptable return on equity - -- NOI must be
sufficient to:
- 1. Limited financial resources/wealth
2. Leverage amplifies equity returns (& risk)
3. Also permits more portfolio diversification - -Why do investors borrow?
- Profitability Ratios - -o Capitalization rate (Ro )
o Equity dividend rate (Cash-on-cash Return)
- Financial risk ratios - -o Operating expense ratio
o Loan-to-value ratio (LTV)
o Debt coverage ratio (DCR)
o Debt yield ratio (DYR)
- Capitalization Rate - -= NOI/acquisition price
- The Higher NOI - -the Higher Price
- The Lower NOI - -the Lower Price
- Cap Rate (%) - -Represents the "capital market"
- The Higher Cap Rate - -the Lower Price
- The Lower Cap Rate - -the Higher Price
- cap rates vary inversely with - -quality, class
- Cap rates vary by - -property type risk
- Equity Dividend Rate (EDR) - -= BTCF / Equity investment
- Equity Dividend Rate - -commonly called cash-on-cash return
- Operating Expense Ratio - -Operating Expenses / Effective Gross Income
- Loan-to-Value Ratio (LTV) - -Mortgage Balance /Acquisition Price
- no greater than 65-75% of acquisition price - -Lenders generally want LTV
of first mortgage loan to be
