BUS-R 305 EXAM 1 QUESTIONS WITH VERIFIED
ANSWERS
4 ways Real Estate pays you - Answers - - Cash Flow
- Shelter or deferral (tax benefits)
- Mortgage Amortization - Equity
- Appreciation - Property will appreciate by at least inflation
- Redevelopment (5th way)
Location - Answers - - Highly correlated with occupancy
- Drives Appreciation and good cash flows
What happens to the tax if you hold property for more than 1 year? - Answers - Goes
down by half
Is the interest on tax deductible? - Answers - Yes, interest is tax deductible
Is depreciation a deduction? - Answers - Yes, however, you're not actually spending the
cash - however many years you depreciate over depends on tax code
Biggest barrier to entry? - Answers - Property management
If the investor's objective is to build income, they should... - Answers - Buy and sell
properties pretty quickly
If the investor's objective is to build wealth, they should... - Answers - Hold assets for a
long time
Initial Cash Flow - Answers - Initial purchase price or down payment going out
Cash Flow - Answers - The cash flow returning to the landlord while they hold or
operate the property
Residual Cash Flow - Answers - Cash flow that returns to you when you sell the
property
Cash Flow Model - Answers - Gross Rental Income (Potential Gross Income)
Less: Vacancy
= Effective Gross Income
Less: Operating Expenses
= Net Operating Income
Less: Debt service
= Cash Flow (Before Tax)
, Is buying and selling real estate on a before or after tax basis - Answers - Before tax
basis
Positive Leverage - Answers - - The unlevered overall return is greater than the interest
rate on the debt
- The levered return must create higher revenue because nobody would take loans if
they didn't create higher.
Indication that the investment is generating returns greater than the cost of borrowing -
Answers - Interest Rate on Debt< Total Return on Asset (IRR)
As you start to borrow with positive leverage... - Answers - The return to equity investors
increases relative to having no debt
Capital Stack - Answers - Debt to equity ratio in a deal
Unlevered - 0% debt, 100% equity
Bonds (Risk, Current Yield, Appreciation Potential, Total Return, Inflation Protection) -
Answers - Moderate to low, Highest, None, Modest, Bad
Stocks (Risk, Current Yield, Appreciation Potential, Total Return, Inflation Protection) -
Answers - High, Low, Good, Moderate to high, Good
Real Estate (Risk, Current Yield, Appreciation Potential, Total Return, Inflation
Protection) - Answers - Moderate to low, Moderate, Slow, Moderate, Excellent
Sources of Risk - Economic - Answers - Very little control
Sources of Risk - Business or management - Answers - Good level of control over
Sources of Risk - Financial - Answers - Total control - we decide how much we pay for it
and how much we finance it
Sources of Risk - Liquidity - Answers - Higher level of control
Sources of Risk - Political - Answers - Very little control
How do you protect yourself from uncertain risk as a seller? - Answers - Putting
contingencies into the contract - The less contingencies in the contract the more the
homeowner is likely to sell to you
- How you shift risk
Risk Premiums - Answers - - Looking at similar deals and seeing where they're done at
- Gives you a starting point for IRR (Example page 5 of notes)
ANSWERS
4 ways Real Estate pays you - Answers - - Cash Flow
- Shelter or deferral (tax benefits)
- Mortgage Amortization - Equity
- Appreciation - Property will appreciate by at least inflation
- Redevelopment (5th way)
Location - Answers - - Highly correlated with occupancy
- Drives Appreciation and good cash flows
What happens to the tax if you hold property for more than 1 year? - Answers - Goes
down by half
Is the interest on tax deductible? - Answers - Yes, interest is tax deductible
Is depreciation a deduction? - Answers - Yes, however, you're not actually spending the
cash - however many years you depreciate over depends on tax code
Biggest barrier to entry? - Answers - Property management
If the investor's objective is to build income, they should... - Answers - Buy and sell
properties pretty quickly
If the investor's objective is to build wealth, they should... - Answers - Hold assets for a
long time
Initial Cash Flow - Answers - Initial purchase price or down payment going out
Cash Flow - Answers - The cash flow returning to the landlord while they hold or
operate the property
Residual Cash Flow - Answers - Cash flow that returns to you when you sell the
property
Cash Flow Model - Answers - Gross Rental Income (Potential Gross Income)
Less: Vacancy
= Effective Gross Income
Less: Operating Expenses
= Net Operating Income
Less: Debt service
= Cash Flow (Before Tax)
, Is buying and selling real estate on a before or after tax basis - Answers - Before tax
basis
Positive Leverage - Answers - - The unlevered overall return is greater than the interest
rate on the debt
- The levered return must create higher revenue because nobody would take loans if
they didn't create higher.
Indication that the investment is generating returns greater than the cost of borrowing -
Answers - Interest Rate on Debt< Total Return on Asset (IRR)
As you start to borrow with positive leverage... - Answers - The return to equity investors
increases relative to having no debt
Capital Stack - Answers - Debt to equity ratio in a deal
Unlevered - 0% debt, 100% equity
Bonds (Risk, Current Yield, Appreciation Potential, Total Return, Inflation Protection) -
Answers - Moderate to low, Highest, None, Modest, Bad
Stocks (Risk, Current Yield, Appreciation Potential, Total Return, Inflation Protection) -
Answers - High, Low, Good, Moderate to high, Good
Real Estate (Risk, Current Yield, Appreciation Potential, Total Return, Inflation
Protection) - Answers - Moderate to low, Moderate, Slow, Moderate, Excellent
Sources of Risk - Economic - Answers - Very little control
Sources of Risk - Business or management - Answers - Good level of control over
Sources of Risk - Financial - Answers - Total control - we decide how much we pay for it
and how much we finance it
Sources of Risk - Liquidity - Answers - Higher level of control
Sources of Risk - Political - Answers - Very little control
How do you protect yourself from uncertain risk as a seller? - Answers - Putting
contingencies into the contract - The less contingencies in the contract the more the
homeowner is likely to sell to you
- How you shift risk
Risk Premiums - Answers - - Looking at similar deals and seeing where they're done at
- Gives you a starting point for IRR (Example page 5 of notes)
