Practice Exam Chapter 17

32. A residential duplex sells for $500,000. Closing costs total $32,500 and land represents 25% of the value. How much depreciation may be taken per year for tax purposes?

(a) $15,456 (b) $14,522 (c) $12,600 (d) $10,240 Correct answer: b $500,000 + $32,500 = $532,500 Acquisition Cost $532,500 x .75 (building) = $399,375 Basis for depreciation $399,375 ÷ 27.5 = $14,522 Per year cost recover

25. The risk of loss due to fire and theft is normally considered which type of risk?

(a) Static risk (b) Market risk (c) Dynamic risk (d) Business risk Correct answer: a Risk is the possibility of losing all or part of the investment. Every investment involves a certain degree of risk. There are two primary types of risk: dynamic and static. Dynamic risk is risk associated with changes in general market conditions. Static risk is risk that can be offset with insurance, which includes fire, flood, robbery and so on.

John purchased his home for $328,000 with 95% financing. Calculate the down payment required.

$16,400

A residential duplex sells for $500,000. Closing costs total $32,500 and land represents 25% of the value. How much depreciation may be taken per year for tax purposes?

(b) $14,522 $500,000 + $32,500 = $532,500 Acquisition Cost $532,500 x .75 (building) = $399,375 Basis for depreciation $399,375 ÷ 27.5 = $14,522 Per year cost recovery They are a noncash expense used to replace short-lived components that wear out from time to time.

31. Which of the following is not considered an operating expense for appraisal or income tax purposes? (a) Fixed expenses (b) Variable expenses (c) Reserve for replacements (d) Correct answer: d Operating expenses include fixed expenses, variable expenses, and reserve for replacements. Mortgage payments, called debt service, are not considered an operating expense. Real estate cannot borrow money, people do. The type and amount of financing is dictated by the needs of the investor, not the property. It would be inappropriate to charge the property for something unrelated to its operation. Fixed expenses include costs that do not change with the level of occupancy, such as real estate taxes and hazard insurance. Variable expenses change with the level of occupancy and include costs such as management fees, maintenance, utilities, yard care, and janitorial services. Reserve for replacements is a noncash expense. This money is for future use to replace worn out components, or short-lived items, such as carpeting, appliances, central heat and air systems, and roof coverings.

Annual debt service

Which document most closely resembles a deed?

Bill of Sale

Risk is the possibility of losing all or part of the investment. Every investment involves a certain degree of risk. There are two primary types of risk: dynamic and static.

Dynamic risk is risk associated with changes in general market conditions. Static risk is risk that can be offset with insurance, which includes fire, flood, robbery and so on.

The process of real estate investment analysis is important to an investor

Helps an investor select properties that meet personal objectives.

6. If an investor earns a lower rate of return on capital invested than the rate paid on borrowed funds, what type of leverage is indicated?

Negative

8. When estimating the value of a business, which item is NOT relevant?

Personal income taxes

The document used to secure financing of personal property under the Uniform Commercial Code is a

Security Agreement.

3. Which of the following statements regarding reserves for replacements is correct? has no physical existence, but has monetary value. This includes things like a company's reputation with clients. Reference: Chapter 17, Business Enterprise and Opportunity Brokerage, Accounting Terms 10. Which of the following statements regarding business brokerage is correct? (a) It should not be conducted by real estate licensees. (b) It cannot be conducted by real estate licensees unless they also possess a mortgage broker's license. (c) It consists primarily of analyzing financial statements. (d) It would rarely involve securities transactions. Correct answer: c Business brokerage consists primarily of analyzing financial statements. Those engaged in this aspect of real estate are required to have knowledge concerning business formations and be able to read and understand operating statements and financial balance sheets. Reference: Chapter 17, Business Enterprise and Opportunity Brokerage 19. An investment property is being analyzed and the information shown has been obtained. Based on this information, what is the operating expense ratio? (a) 16% (b) 47% (c) 53% (d) 75% Correct answer: b Operating expense ratio = Operating expenses (OE) ÷ Effective gross income (EGI) First, you must calculate the Operating expenses. EGI - OE = NOI, so EGI - NOI = OE Operating expenses (OE) = $65,800 (EGI) - $34,600 (NOI) = $31,200 Operating expense ratio = $31,200 (OE) ÷ $65,800 (EGI) = 0,47, or 47%. Reference: Chapter 17, Evaluating Investment Properties, Operating Expense Ratio 20. An investment property is being analyzed and the information shown has been obtained. Based on this information, what is the before-tax cash flow? (a) $13,452 (b) $15,795 (c) $35,400 (d) $44,652 Correct answer: a Net operating income (NOI) - Annual debt service (ADS) = Cash throw-off (before-tax cash flow) $34,600 (NOI) - $21,148 (ADS) = $13,452 (CTO) Cash throw-off, or before-tax cash flow.

They are a noncash expense used to replace short-lived components that wear out from time to time.

Reserves for replacements

are noncash expense usedto replace short-lived components that wear out from time to time.

5. What type of risk is caused by changes in general business conditions?

a) Dynamic

Which documents indicates the financial conditions of a business as of a particular time?

balance sheet

Business Brokerage

consist primarily of analyzing financial statements.

What type of risk is caused by changes in general business conditions

dynamic

If an investor earns a lower rate of return on capital invested than the rate paid on borrowed funds, what type of leverage is indicated?

negative

The correct formula for loan-to-value ratio is

loan divided by value.

The use of " by-bidders" in the auctioning of property is

not allowed

The assets of a business does NOT include

notes payable

When estimating the valueof a business, which item is not relevant?

personal income tax

Fixed expenses typically include

real estate taxes and hazard insurance

Real estate licensees that are engaged in business brokerage might need to have a securities license if the transaction involves

transferring shares of stock or limited partnership interest