REAL ESTATE MIDTERM 1 QUESTIONS
WITH COMPLETE ANSWERS
Evolution vvof vvReal vvEstate vv- vvAnswer vvReal vvestate vvhas vvexisted vvsince vvhumans
vvrealized vva vvneed vvfor vvshelter. vvForm vvfollows vvfunction. vvOwnership vvstructures
vvhave vvevolved vvover vvtime. vv
Pyramid vvof vvDjoser vv- vv2630 vvBC
Great vvWall vvof vvChina vv- vv7th vvcentury vvBC
Acropolis vv- vv5th vvcentury vvBC
Roman vvColiseum vv- vv72 vvAD
Bath, vvEngland vv- vv70 vvAD
York, vvEngland vv- vv79 vvAD
Land vv- vvAnswer vv-Land vvwas vvoften vva vvreward vvfor vvservice vvto vvthe vvKing
-Traditionally vva vvkey vvcreator vvof vvwealth vvthat vvpassed vvthrough vvgenerations
-primogenitor vvwas vvgreat, vvbut vvonly vvif vvyou vvwere vvthe vvfirst vvborn vvson.
Real vvEstate vvin vvthe vvold vvworld vv- vvAnswer vvLand vvand vvproperty vv"entailed" vvand
vvpassed vvdown vvthrough vvgenerations vv- vvgenerally vvto vveldest/oldest vvson. vvEven vvif
vvit vvwere vvavailable, vvproperty vvownership vvwas vvprohibited vvby vvlaw vvfor vvmany.
Real vvEstate vvin vvthe vvnew vvworld vv- vvAnswer vv-Owning vvreal vvestate vvsignified
vv"having vvmade vvit"
-Real vvestate vvwas vvconsidered vva vvsafe vvplace vvto vvhold vvyour vvwealth.
Perks:
-Harder vvto vvsteal vvthan vvcash vvor vvjewels
-Something vvto vvpass vvto vvthe vvnext vvgeneration vv
-You vvcould vvtouch vvit vvand vvcheck vvon vvit vveveryday.
Public vvpolicy vvencouraged vvproperty vvownership vv- vvAnswer vv-Land vvgrants vvwere
vvused vvto vvencourage vvsettlement vvas vvnation vvpushed vvwest
-"the vvAmerican vvDream" vvgained vva vvtangible vvsymbol
-Eventually vvtax vvcode vvevolved vvto vvencourage vvreal vvestate vvownership.
Real vvEstate vvownership vvbecome vvmore vvcommonplace vv- vvAnswer vv-After vvWWII,
vvGI vvBill vvencouraged vvhome vvownership vv(major vvfactor vvin vvcreation vvof vvmiddle
vvclass)
-In vvtime, vvother vvtypes vvof vvreal vvestate vvinvestment vvwas vvencouraged vvby
vv"syndicators" vvwho vvsold vvoff vvshares vvin vvreal vvestate, vvmainly vvfor vvtax
vvadvantages.
,Tax vvcode vvencouraged vvreal vvestate vvinvestment vv- vvAnswer vvTax vvcodes:
-Mortgage vvinterest vvdeduction vv- vvfor vvcommercial vvas vvwell vvas vvresidential vvowners
-Commercial vvinvestors vvable vvto vvuse vvdepreciation vvexpense
-Syndication vvof vvcommercial vvproperties vvallowed vvindividuals vvto vvuse vvreal vvestate
vvto vvuse vvpassive vv"losses" vvto vvshelter vvincome. vv(reduce vvthe vvamount vvof vvincome
vvtaxes vvyou vvowe.) vvPassive vvlosses: vvcan vvstem vvfrom vvinvestments vvin vvrental
vvproperties, vvbusiness vvpartnerships, vvor vvother vvactivities vvin vvwhich vvan vvinvestor
vvis vvnot vvmaterially vvinvolved.
-Capital vvgains vvrules vvand vvinheritance vvtax vvrules vvencouraged vvgenerational
vvtransfers.
Real vvEstate vvin vvthe vv1980's vv- vvAnswer vv-The vvtax vvlaw vvchanges vvin vv1986
vveliminated vvthe vvbenefits vvof vvsyndication vvfor vvmost vvindividual vvinvestors.
-A vvseries vvof vv"rolling vvrecessions" vv(a vvrolling vvadjustment vvrecession vvoccurs
vvwhen vvthe vvrecession vvonly vvaffects vvcertain vvsectors vvof vvthe vveconomy vvat vva
vvtime) vvacross vvthe vvcountry vvprompted vvfeds vvto vvchange vvbanking vvrules, vvcausing
vvmany vvloan vvforeclosures.
-New vvlegislation vvallowed vvpension vvfunds vvto vvinvest vvin vvreal vvestate vvas vva
vvseparate vvasset vvclass.
Banking vvcrisis vvof vvlate vv80s-90s vv- vvAnswer vv-The vvbanking vvcrisis vvtriggered vva
vvwave vvof vvdefaults
-Wall vvStreet vvsmelled vvblood vvin vvthe vvwater vvand vvdiscovered vvreal vvestate
-Real vvEstate vvoperating vvcompanies vvwere vvfaced vvwith vvoption vvof vvfiling
vvbankruptcy vvor vvfiling vvIPO's vvwhich vvis vvwhen vvthe vvREIT vvmarket vvwas vvborn vv:).
Real vvEstate vvInvestment vvTrusts vv(REITs) vv- vvAnswer vvPublicly vvtraded vvand
vvregulated vvstocks vvof vvcompanies vvthat vvhold vvreal vvestate, vvcurrently vvroughly vv$1
vvtrillion vvin vvsize
Toyota's vvWoven vvCity vv- vvAnswer vv"A vvprototype vvcity" vvfocused vvon vvthe vvfuture vvof
vvconnectivity vvautonomy vvshared vvmobility vvand vva vvreplication vvor vvcase vvas vvwe
vvcall vvit. vvWoven vvcity vvis vva vvprototype vvcity vvwhere vvthey'll vvsafety vvtest vvall vvkinds
vvof vvtechnologies vvand vvhave vvreal vvpeople vvlive vvin vvit. vv
175 vvacre vvsites vvin vvFujiyamma, vvJapan
Why vvinvest vvin vvreal vvestate vvtoday? vv- vvAnswer vv-Real vvproperty vvis vvtangible vvand
vvprovides vvpsychological vvsatisfaction.
-A vvmajor vvsource vvof vvwealth vvcreation.
-Tax vvlaws vvstill vvfavor vvreal vvestate vvand vvREIT vvinvestment
-Fits vvbetween vvBonds vvand vvStocks vvon vvRisk/Reward vvcontinuum
, -Inflation vvHedge vv(offset vvthe vvrisk vvof vvinflation), vvrents vvreset vvas vvleases vvexpire,
vvmoving vvwith vvinflation
Property vvtype vvcharacteristics vv- vvAnswer vvOffice: vvhard vvto vvduplicate, vvlong
vvdevelopment vvtime vvframe, vvcapital vvintensive, vvand vvlong vvlease vvterm.
Industrial: vvEasy vvto vvduplicate, vvshort vvdevelopment vvtime vvframe, vvnot vvcapital
vvintensive, vvmidterm vvlease vvterm.
Retail: vvDEPENDS vvCan vvbe vveasy vvor vvhard vvto vvduplicate vv(depends),
vvdevelopment vvtime vvframe vvdepends, vvcapital vvintensiveness vvdepends, vvand vvlease
vvterm vvdepends. vv
Multifamily: vvEasy vvto vvduplicate, vvmoderate vvtime vvframe vvto vvdevelop, vvmoderately
vvcapital vvintensive, vvand vvshort vvlease vvterm. vv
Hotels: vvHard vvto vvduplicate, vvlong vvtime vvto vvdevelop, vvcapital vvintensive vv, vvand
vvlease vvterm vvis vvnightly.
Each vvproperty vvtype vvhas vvdifferent vvrisk-reward vvprofile vv- vvAnswer vv-Diversification
vvis vvdone vvwith vvwise vvand vvcare vv(across vvproperty vvtypes vvas vvwell vvas
vvgeographically) vv
-It's vvdifficult vvto vvhave vvexpertise vvacross vvall vvproperty vvtypes vvor vvmarkets.
Net vvoperating vvincome vvformula vv- vvAnswer vvOperating vvRevenues vv- vvOperating
vvExpenses vv= vvNet vvOperating vvIncome
Projected vvNOI vv- vvAnswer vvBudget: vvestimate vvby vvoperating vvbusiness vvfor vvthe
vvnext vvyear
Pro vvforma: vvEstimate vvby vvpotential vvinvestor vvfor vvnext vvyear.
Capitalization vvrate vv- vvAnswer vvCap vvrate vv= vvNOI/Investment
or
Investment vv= vvNOI/Cap vvrate
Pro vvforma vvNOI vvis vvused vvto vvdetermine vvpurchase vvprice. vvCapitalization vvrate vvis
vva vvkey vvmeasure vvof vvreal vvestate vvpricing. vv
Also vvdefined vvas vvthe vvrate vvof vvreturn vvon vvan vvinvestment vvbased vvon vvthe
vvincome vvthe vvproperty vvis vvexpected vvto vvgenerate. vv
What vvcould vvgo vvwrong? vv
-Estimated vvrevenues, vvexpenses, vvor vvcapital vvneeds vvare vvoff.
-Difficult vvto vvproject vvanything vvtwelve vvmonths vvin vvadvance. vvAn vvinvestment vvpro
vvforma vvmay vvgo vvout vvup vvto vv5-10 vvyears.
-Still, vvit's vvthe vvbest vvmethod vvreal vvestate vvinvestors vvhave.
WITH COMPLETE ANSWERS
Evolution vvof vvReal vvEstate vv- vvAnswer vvReal vvestate vvhas vvexisted vvsince vvhumans
vvrealized vva vvneed vvfor vvshelter. vvForm vvfollows vvfunction. vvOwnership vvstructures
vvhave vvevolved vvover vvtime. vv
Pyramid vvof vvDjoser vv- vv2630 vvBC
Great vvWall vvof vvChina vv- vv7th vvcentury vvBC
Acropolis vv- vv5th vvcentury vvBC
Roman vvColiseum vv- vv72 vvAD
Bath, vvEngland vv- vv70 vvAD
York, vvEngland vv- vv79 vvAD
Land vv- vvAnswer vv-Land vvwas vvoften vva vvreward vvfor vvservice vvto vvthe vvKing
-Traditionally vva vvkey vvcreator vvof vvwealth vvthat vvpassed vvthrough vvgenerations
-primogenitor vvwas vvgreat, vvbut vvonly vvif vvyou vvwere vvthe vvfirst vvborn vvson.
Real vvEstate vvin vvthe vvold vvworld vv- vvAnswer vvLand vvand vvproperty vv"entailed" vvand
vvpassed vvdown vvthrough vvgenerations vv- vvgenerally vvto vveldest/oldest vvson. vvEven vvif
vvit vvwere vvavailable, vvproperty vvownership vvwas vvprohibited vvby vvlaw vvfor vvmany.
Real vvEstate vvin vvthe vvnew vvworld vv- vvAnswer vv-Owning vvreal vvestate vvsignified
vv"having vvmade vvit"
-Real vvestate vvwas vvconsidered vva vvsafe vvplace vvto vvhold vvyour vvwealth.
Perks:
-Harder vvto vvsteal vvthan vvcash vvor vvjewels
-Something vvto vvpass vvto vvthe vvnext vvgeneration vv
-You vvcould vvtouch vvit vvand vvcheck vvon vvit vveveryday.
Public vvpolicy vvencouraged vvproperty vvownership vv- vvAnswer vv-Land vvgrants vvwere
vvused vvto vvencourage vvsettlement vvas vvnation vvpushed vvwest
-"the vvAmerican vvDream" vvgained vva vvtangible vvsymbol
-Eventually vvtax vvcode vvevolved vvto vvencourage vvreal vvestate vvownership.
Real vvEstate vvownership vvbecome vvmore vvcommonplace vv- vvAnswer vv-After vvWWII,
vvGI vvBill vvencouraged vvhome vvownership vv(major vvfactor vvin vvcreation vvof vvmiddle
vvclass)
-In vvtime, vvother vvtypes vvof vvreal vvestate vvinvestment vvwas vvencouraged vvby
vv"syndicators" vvwho vvsold vvoff vvshares vvin vvreal vvestate, vvmainly vvfor vvtax
vvadvantages.
,Tax vvcode vvencouraged vvreal vvestate vvinvestment vv- vvAnswer vvTax vvcodes:
-Mortgage vvinterest vvdeduction vv- vvfor vvcommercial vvas vvwell vvas vvresidential vvowners
-Commercial vvinvestors vvable vvto vvuse vvdepreciation vvexpense
-Syndication vvof vvcommercial vvproperties vvallowed vvindividuals vvto vvuse vvreal vvestate
vvto vvuse vvpassive vv"losses" vvto vvshelter vvincome. vv(reduce vvthe vvamount vvof vvincome
vvtaxes vvyou vvowe.) vvPassive vvlosses: vvcan vvstem vvfrom vvinvestments vvin vvrental
vvproperties, vvbusiness vvpartnerships, vvor vvother vvactivities vvin vvwhich vvan vvinvestor
vvis vvnot vvmaterially vvinvolved.
-Capital vvgains vvrules vvand vvinheritance vvtax vvrules vvencouraged vvgenerational
vvtransfers.
Real vvEstate vvin vvthe vv1980's vv- vvAnswer vv-The vvtax vvlaw vvchanges vvin vv1986
vveliminated vvthe vvbenefits vvof vvsyndication vvfor vvmost vvindividual vvinvestors.
-A vvseries vvof vv"rolling vvrecessions" vv(a vvrolling vvadjustment vvrecession vvoccurs
vvwhen vvthe vvrecession vvonly vvaffects vvcertain vvsectors vvof vvthe vveconomy vvat vva
vvtime) vvacross vvthe vvcountry vvprompted vvfeds vvto vvchange vvbanking vvrules, vvcausing
vvmany vvloan vvforeclosures.
-New vvlegislation vvallowed vvpension vvfunds vvto vvinvest vvin vvreal vvestate vvas vva
vvseparate vvasset vvclass.
Banking vvcrisis vvof vvlate vv80s-90s vv- vvAnswer vv-The vvbanking vvcrisis vvtriggered vva
vvwave vvof vvdefaults
-Wall vvStreet vvsmelled vvblood vvin vvthe vvwater vvand vvdiscovered vvreal vvestate
-Real vvEstate vvoperating vvcompanies vvwere vvfaced vvwith vvoption vvof vvfiling
vvbankruptcy vvor vvfiling vvIPO's vvwhich vvis vvwhen vvthe vvREIT vvmarket vvwas vvborn vv:).
Real vvEstate vvInvestment vvTrusts vv(REITs) vv- vvAnswer vvPublicly vvtraded vvand
vvregulated vvstocks vvof vvcompanies vvthat vvhold vvreal vvestate, vvcurrently vvroughly vv$1
vvtrillion vvin vvsize
Toyota's vvWoven vvCity vv- vvAnswer vv"A vvprototype vvcity" vvfocused vvon vvthe vvfuture vvof
vvconnectivity vvautonomy vvshared vvmobility vvand vva vvreplication vvor vvcase vvas vvwe
vvcall vvit. vvWoven vvcity vvis vva vvprototype vvcity vvwhere vvthey'll vvsafety vvtest vvall vvkinds
vvof vvtechnologies vvand vvhave vvreal vvpeople vvlive vvin vvit. vv
175 vvacre vvsites vvin vvFujiyamma, vvJapan
Why vvinvest vvin vvreal vvestate vvtoday? vv- vvAnswer vv-Real vvproperty vvis vvtangible vvand
vvprovides vvpsychological vvsatisfaction.
-A vvmajor vvsource vvof vvwealth vvcreation.
-Tax vvlaws vvstill vvfavor vvreal vvestate vvand vvREIT vvinvestment
-Fits vvbetween vvBonds vvand vvStocks vvon vvRisk/Reward vvcontinuum
, -Inflation vvHedge vv(offset vvthe vvrisk vvof vvinflation), vvrents vvreset vvas vvleases vvexpire,
vvmoving vvwith vvinflation
Property vvtype vvcharacteristics vv- vvAnswer vvOffice: vvhard vvto vvduplicate, vvlong
vvdevelopment vvtime vvframe, vvcapital vvintensive, vvand vvlong vvlease vvterm.
Industrial: vvEasy vvto vvduplicate, vvshort vvdevelopment vvtime vvframe, vvnot vvcapital
vvintensive, vvmidterm vvlease vvterm.
Retail: vvDEPENDS vvCan vvbe vveasy vvor vvhard vvto vvduplicate vv(depends),
vvdevelopment vvtime vvframe vvdepends, vvcapital vvintensiveness vvdepends, vvand vvlease
vvterm vvdepends. vv
Multifamily: vvEasy vvto vvduplicate, vvmoderate vvtime vvframe vvto vvdevelop, vvmoderately
vvcapital vvintensive, vvand vvshort vvlease vvterm. vv
Hotels: vvHard vvto vvduplicate, vvlong vvtime vvto vvdevelop, vvcapital vvintensive vv, vvand
vvlease vvterm vvis vvnightly.
Each vvproperty vvtype vvhas vvdifferent vvrisk-reward vvprofile vv- vvAnswer vv-Diversification
vvis vvdone vvwith vvwise vvand vvcare vv(across vvproperty vvtypes vvas vvwell vvas
vvgeographically) vv
-It's vvdifficult vvto vvhave vvexpertise vvacross vvall vvproperty vvtypes vvor vvmarkets.
Net vvoperating vvincome vvformula vv- vvAnswer vvOperating vvRevenues vv- vvOperating
vvExpenses vv= vvNet vvOperating vvIncome
Projected vvNOI vv- vvAnswer vvBudget: vvestimate vvby vvoperating vvbusiness vvfor vvthe
vvnext vvyear
Pro vvforma: vvEstimate vvby vvpotential vvinvestor vvfor vvnext vvyear.
Capitalization vvrate vv- vvAnswer vvCap vvrate vv= vvNOI/Investment
or
Investment vv= vvNOI/Cap vvrate
Pro vvforma vvNOI vvis vvused vvto vvdetermine vvpurchase vvprice. vvCapitalization vvrate vvis
vva vvkey vvmeasure vvof vvreal vvestate vvpricing. vv
Also vvdefined vvas vvthe vvrate vvof vvreturn vvon vvan vvinvestment vvbased vvon vvthe
vvincome vvthe vvproperty vvis vvexpected vvto vvgenerate. vv
What vvcould vvgo vvwrong? vv
-Estimated vvrevenues, vvexpenses, vvor vvcapital vvneeds vvare vvoff.
-Difficult vvto vvproject vvanything vvtwelve vvmonths vvin vvadvance. vvAn vvinvestment vvpro
vvforma vvmay vvgo vvout vvup vvto vv5-10 vvyears.
-Still, vvit's vvthe vvbest vvmethod vvreal vvestate vvinvestors vvhave.
