Real Estate Express Chapter 29 ❤️

The best starting point for estimating a property's current operations is ____________________________.

by looking at the property's recent past operations.

cash flow

cash received minus the cash paid out over a given period of time

capitalization (CAP) rate

designed to reflect the recapture rate of an investment over it's economic life to give the investor an acceptable rate of return on their investment

variable expenses

expenses that change from month to month

Estimating a property's recent operating history is most accurately accomplished by ______________________________.

looking at comparable properties.

pro forma income statement

similar to a historical income statement, except it projects the future rather than tracks the past

Base after-tax cash flow calculations off of _____________ income.

taxable

Before-tax cash flow

the measure of the cash received after the net income and AFTER any mortgage-related expenses are paid, but BEFORE taxes are taken into consideration

Debt service

the principal and interest payments made on a debt over a period of time

after-tax cash flow

the profit that the investor actually receives from income-producing property after the income taxes, mortgage, and all other expenses are paid

What is the two-step process for estimating current operation costs?

- Identify comparable properties. - Compare data to published sources.

List two examples of variable expenses.

- Management fees - Utility expenses

Name three factors that affect net operating income.

- Market rent - Vacancy - Expenses

List three examples of fixed expenses.

- Real estate taxes - Insurance premiums - Advertising

cash-on-cash return

- also called the equity dividend rate - the ratio of yearly before-tax cash flow to the total amount of cash invested, expressed as a percentage

market rent

- also known as economic rent - the price that a specific type of property is likely to draw under the current market conditions

What is the equity dividend rate?

- ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. - also known as cash-on-cash return

What is a tax shelter?

A tax shelter is any investment designed to reduce or avoid income taxes

Which ratio shows the percent of gross income that is required to meet cash expenditures? A) Break-even ratio B) Debt coverage ratio C) Operating ratio D) Income multipliers

A) Break-even ratio

The principal and interest payments made over a period of time is called the A) Debt service. B) Before tax cash flow. C) Tax liability. D) Operating expenses.

A) Debt service.

What is the formula for determining tax liability? A) Taxable income x tax bracket percent B) NOI x tax bracket percent C) NOI - taxable income D) Taxable income - expenses

A) Taxable income x tax bracket percent

How is an investor's tax liability derived?

An investor's tax liability from a property is based on taxable income rather than cash flow

If an investor has a before tax cash flow of $18,000 and a tax liability of $2,500, what is this investor's after tax cash flow? A) $20,500 B) $15,500 C) $14,000 D) $16,000

B) $15,500

If a property has a potential income of $50,000, a vacancy loss of $4,500, and operating expenses of $23,000, what is this property's net operating income? A) $45,500 B) $22,500 C) $27,000 D) $54,500

B) $22,500

If the annual income for a property is $34,000 and the capitalization rate is 13 percent, which of these figures is an accurate estimate of the property's value? A) $283,333 B) $261,538 C) $242,857 D) $340,000

B) $261,538

Investor Josh has a BTCF of $64,400, taxable income of $69,200, and is in a 28% tax bracket. What is Josh's after tax cash flow? A) $46,368 B) $45,024 C) $49,824 D) $51,168

B) $45,024 The after-tax cash flow is derived by subtracting the tax liability from the before-tax cash flow. Josh's tax liability is $19,376 ($69,200 x .28), so his after-tax cash flow is $45,024 ($64,400 - $19,376).

If a property has a potential income of $120,000, a vacancy loss of $15,000, operating expenses of $52,000, and mortgage expenses of $45,000, what is the net operating income for this property? A) $105,000 B) $53,000 C) $68,000 D) $8,000

B) $53,000

What is the net operating income for a company that has a potential rent income of $23,000, vacancies and collection losses worth $3,100, and operating expenses of $10,200? A) $15,900 B) $9,700 C) $30,100 D) $12,800

B) $9,700

Which of the following is not a factor that affects net operating income? A) Vacancy B) Appreciation C) Market rent D) Expenses

B) Appreciation

Which of the following is NOT a reason for tenants to be attracted to an area with higher transfer costs? A) A "good" neighborhood B) Below average public schools C) A prestigious address D) To be physically close to favorite activities and/or work

B) Below average public schools

Which of the following factors does NOT affect the net operating income of a property? A) Market rent B) Purchase price C) Maintenance D) Vacancy

B) Purchase price

The ________________ measures the investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property. A) break-even ratio B) debt coverage ratio C) operating ratio D) income multipliers

B) debt coverage ratio

To calculate gross operating income, one needs to _________________ gross rental income. A) subtract collection losses and subtract other income from B) subtract collection losses and add other income to C) add collection losses and subtract other income from D) add collection losses and add other income to

B) subtract collection losses and add other income to

What is before-tax cash flow?

Before-tax cash flow is the measure of the cash received after the net operating income has been calculated and any mortgage-related expenses are paid, but before taxes are taken into consideration.

If a property has an NOI of $23,500 and mortgage expenses of $12,000, what is the amount of before tax cash flow for this property? A) $8,000 B) $9,500 C) $11,500 D) $12,500

C) $11,500

Sue's NOI is $128,000, and her operating expenses are $26,400. She has mortgage expenses of $55,250 with $48,000 of that being interest. Her property has depreciated $8,500 for the year and is in a 24% tax bracket. What is Sue's tax liability? A) $15,420 B) $64,250 C) $17,160 D) None

C) $17,160

If the annual income for a property is $180,000 and the capitalization rate is 9 percent, which of these figures is an accurate estimate of the property's value? A) $1,620,000 B) $1,850,000 C) $2,000,000 D) $2,500,000

C) $2,000,000 The value of a property is determined by the formula: Income ÷ Rate = Value. The value of the property in this example is $2,000,000. ($180,000 ÷ .09 = $2,000,000)

What is the effective income for a company that has a potential rent income of $76,500, vacancies and collection losses worth $5,250, and operating expenses of $37,900? A) $76,500 B) $33,350 C) $71,250 D) $38,600

C) $71,250

Investor Kiki's property has a potential rental income of $86,000. The vacancy and collection losses for the year were $21,400. The property had operating expenses of $38,780. Kiki's mortgage expenses for the property were $40,200. What is the before tax cash flow for Kiki's property? A) $25,820 B) $0 C) ($14,380) D) $14,380

C) ($14,380)

Investor Jessica's property has a potential rental income of $2,300,000. The vacancy and collection losses for the year were $124,000. The property had operating expenses of $569,000. Jessica's mortgage expenses for the property were $1,485,000. Jessica invested $750,000 cash for the property's down payment. What is the before-tax cash-on-cash return for Jessica's property? A) 18.27% B) 17.27% C) 16.27% D) 32.80%

C) 16.27%

What is the formula for determining taxable income? A) Potential income - expenses + mortgage interest B) NOI + appreciation - mortgage expenses C) NOI - depreciation - mortgage interest D) Potential income - depreciation - mortgage expenses

C) NOI - depreciation - mortgage interest

A tax shelter is A) a form of illegal tax evasion. B) an investment you do not have to report to the IRS. C) any investment designed to delay, reduce or avoid income taxes. D) not typically in the form of an investment.

C) any investment designed to delay, reduce or avoid income taxes.

What is the gross operating income for a property that has potential rent income of $85,000, vacancy losses of $4,000, extra income of $2,500 and operating expenses of $12,000? A) $66,500 B) $71,500 C) $78,500 D) $83,500

D) $83,500

What is the profit that an investor actually receives from income-producing property? A) Cash flow B) Before-tax cash flow C) Net operating income D) After-tax cash flow

D) After-tax cash flow

Which of the following would NOT be placed under operating expenses on the operating statement? A) Utilities B) Property taxes C) Repairs and maintenance D) Income taxes

D) Income taxes

Which of the following is a variable expense? A) Insurance premiums B) Advertising C) Real estate taxes D) Management fees

D) Management fees

The difference between the gross operating income and the operating expenses is the A) Taxable income. B) Before tax cash flow. C) After tax cash flow. D) Net operating income.

D) Net operating income.

To find the ____________, subtract the debt service from the net operating income. A) after-tax cash flow B) gross income C) cash-on-cash return D) before-tax cash flow

D) before-tax cash flow

At any particular point in time, all the space that is available in a building may not be leased. When units are empty, this is referred to as A) unfulfillment. B) occupancy. C) absorbed. D) vacancy.

D) vacancy.

What is debt service?

Debt service is the principal and interest payments made on a debt over a period of time.

fixed expenses

Expenses that do not change from month to month, such as auto insurance or rent.

Taxable Income x Marginal Tax Rate =

Income Taxes

How does a pro forma income statement differ from an historical income statement?

It projects the future rather than tracks the past.

What is gross rental income?

The amount of revenue a property would generate if it had no vacancies.

Define cash flow.

The cash received minus the cash paid out over a given period of time.

What does a debt coverage ratio measure?

The investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property.

In addition to the demographic makeup of the population and the median income of families in a particular area, what will the market rents for retail space depend on?

The percentage of income families in the area usually spend on the purchase of goods and services from the retail companies in their area.

tax liability

The total amount of taxes you owe

What is a capitalization rate designed to do?

To reflect the recapture rate of an investor's original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.

How does an operating statement differ from a typical income statement?

Unlike a typical income statement, a real estate operating statement presents cash inflows and outflows from operations and non-operating cash flows, such as debt service and income taxes.

Physical durability

a calculation of the building's remaining physical life, based on the building's original design and how it's been maintained

Net Operating Income (NOI)

a term that describes the net income produced by a specific property after all expenses have been deducted EXCEPT MORTGAGE EXPENSES

Functional efficiency

an assessment of how well a property does the job it is supposed to do

tax shelter

any investment designed to delay, reduce or avoid income taxes