Quiz 6

Ownership of land is often compared with a bundle of sticks because: Select one: a. Each stick represents a property right. b. The government does not need to hold any sticks as they have the power of eminent domain. c. With fee simple title, all the sticks are held by the property owner. d. None of the above. e. All of a, b and c are correct.

e

The bundle of rights includes: Select one: a. the right to occupy, exclude others, or to sell. b. the right to borrow against. c. the right to convey by inheritance. d. None of the above. e. All of a, b and c are correct.

e

If a property has interest payments of $1,500 per year, how is the cash flow for the investor calculated? Select one: a. Deducting the interest from the Net Income b. Interest should be ignored, the Net Income is the cashflow c. Gross income less interest d. Add back interest to the Net Income e. None of the above

Casflow includes all cashflows in and out in that year, including interest, capital expenditure, and captila debt flows (n the final year the sale proceeds and debt repayment). Cashflow projections are specifc to the investor and so they include the debt and interest numbers. By contrast, market valuations do not include the specific debt decisions of the individual investor, and so the calculations ignore debt and interest. The correct answer is: Deducting the interest from the Net Income

A residential site is purchased for $198245. Two flats are constructed on the site for a cost of $334895. The developed site is then sold one year later for $851344. What is the profit margin? (Please round your answer to the nearest dollar but exclude the $ sign when typing your answer.)

See the Study Guide: Week 11 Single Period Methods. The correct answer is: 318204

If a property has an annual gross income of $10,000, a vacancy allowance of 10% and operating expenses of $2,000, what is the Net Income? Select one: a. $8,000 b. $10,000 c. $7,000 d. $9,000 e. $7,200

Net income is the gross rental less any vacancy, less expenses. Vacancy is often quoted as a percentage allowance of the gross rental, so in this case 10% of $10,000 is $1,000. Note that Net Income does not include a deduction for interest (but a cash flow does include interest). Net Income relates to the property, whereas cash flow relates to the investor. Debt is specific to the investor. Net income = $10,000 - 10%($10,000) - $2,000 = $7,000. The correct answer is: $7,000

Property markets are generally considered to be an imperfect market and therefore less efficient due to: Select one: a. Very low liquidity b. Relatively few buyers and sellers with infrequent transactions c. Complexity and heterogeneity of property assets d. High transaction costs e. All of the above

Property markets are generally considered to be less efficient due to: small number of buyers and sellers, highly illiquid, the complexity and heterogeneity of property assets (e.g. buildings not readily divisible, legal restrictions and rights, public controls), influence of lending institutions, prices less observable and there are high transaction costs associated with property transactions

Which of the following is NOT an example of an easement? Select one: a. A property benefiting from stormwater pipes to provide drainage through another property. b. A property benefiting from sewer pipes to provide wastewater disposal through another property. c. Adjoining properties each benefiting from a party wall. d. A restriction that indicates there is uncertainty as to where the boundary lines are. e. All of the above are examples of easements.

See Techniques of investment evaluation in Chapter 12. A positive NPV means that the investor's required rate of return was achieved, and so the investment meets the return criteria and can be accepted. A positive NPV also means that the the rate of return being achieved is higher than the required rate of return that the cashflows were discounted at (because there was still a sum of money left over after discounting and deducting the outlay). This means that the actual rate of return (the IRR) will be higher than the required rate of return. The correct answer is: Both a and c

Which of the following is NOT a factor that affects specific risk in property? Select one: a. Tenant quality. b. Lease quality. c. Age and condition of building. d. Interest rates. e. Location.

See the Study Guide: Week 11 Investment Risk. The correct answer is: Interest rates

A block of three flats is leased on a periodic tenancy with a gross rental income of $29962 per annum. The value of the property at the beginning of the investment period is $497820. For the block of flats, operating expenses including vacancies cost $9815 per annum. What is the gross return on this investment? (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

See the Study Guide: Week 11 Single Period Methods. The correct answer is: 0.0602

A block of three flats is leased on a periodic tenancy with a gross rental income of $41501 per annum. The value of the property at the beginning of the investment period is $414945. For the block of flats, operating expenses including vacancies cost $9980 per annum. What is the net return on this investment? (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

See the Study Guide: Week 11 Single Period Methods. The correct answer is: 0.0760

A block of three flats is leased on a periodic tenancy with a gross rental income of $56510 per annum. The value of the property at the beginning of the investment period is $433082. For the block of flats, operating expenses including vacancies cost $10050 per annum. What is the net return on this investment? (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

See the Study Guide: Week 11 Single Period Methods. The correct answer is: 0.1073

A property is bought for $100,000 using $60,000 equity and $40,000 debt. It has a gross income of $12,000, landlord operating expenses of $4,000 and interest of $3,000. What is the Net Income return on equity? Select one: a. 5% b. 8.3% c. 12% d. 11.67% e. Cannot be calculated

See the Study Guide: Week 11 Single Period Methods. Two matters are important here. Firstly this is a return on equity, so we use the equity of $60,000. If it were a return on the property itself, the value of $100,000 would be used. Secondly, we are calculating the return on equity so we must deduct the 'return on debt - i.e. the interest payment'. Therefore the calculation is ($12,000-$4,000-$3,000)/60,000. The correct answer is: 8.3%

Assume that a block of three flats is purchased at a price of $828213 and provides security for a $216403 flat mortgage at an annual interest rate of 9.64%. This property has a gross rental income of $85888 and operating expenses of $24304 per annum. What is the return on equity invested in this property? (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

See the Study Guide: Week 11 Single Period Methods. Equity return = Equity income/ Equity value in the property at the beginning of the investment period The correct answer is: 0.0666

A block of three flats is leased on a periodic tenancy with a gross rental income of $29911 per annum. The value of the property at the beginning of the investment period is $497174. For the block of flats, operating expenses including vacancies cost $9815 per annum. What is the gross return on this investment? (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

See the Study Guide: Week 11 Single Period Methods. Gross return= Gross income/p0 The correct answer is: 0.0602

A block of three flats purchased at a price of $625000 is leased on a periodic tenancy with a gross rental income of $85164 per year, a vacancy allowance of 6%, and annual operating expenses of $31347. What it the net operating income? (Please round your answer to the nearest dollar but exclude the $ sign when typing your answer.)

See the Study Guide: Week 11 Single Period Methods. Net operating income = Net rental income - Operating expenses = Gross rental income*(1 - Vacancy rate) - Operating expenses The correct answer is: 48707

A vacant commercial site is purchased for $150,000, a building is constructed on the site for a cost of $350,000. The improved property is then sold for $650,000. The single period return on cost to the developer is: Select one: a. 77%. b. 23%. c. 54%. d. 30%. e. 70%

See the Study Guide: Week 11 Single Period Methods. The correct answer is: 30%.

A property has a sale price of $120,000, a gross income of $10,000, landlord operating expenses of $2,000 and interest of $2,000. What is the capitalisation rate that applies to this sale? Select one: a. 6.67% b. 8.33% c. 5% d. 10% e. Cannot be calculated

See the Study Guide: Week 4 Capitalisation of Income. Remember that the debt is specific to an owner and does not come into objective (market) valuation calculations, so ignore the interest information provided. Therefore the capitalisation rate is the NET income (gross rent less expenses) divided by the value. The correct answer is: 6.67%

Consider a property with a gross rental income of $59542 per annum and operating expenses of $10797 per annum, and a required rate of return of 9.70%. What is the estimated value of this property? (Please round your answer to the nearest dollar but exclude the $ sign when typing your answer.)

See the Study Guide: Week 4 Capitalisation of Income. Capitalisation rate valuation= V= net income/r V= value of property r= required rate of return (or capitalisation rate) The correct answer is: 502526

A property was purchased at a price of $309047 at the beginning of the year. This property has a gross rental income of $58598 per annum and operating expenses of $12627 per annum. At the end of the year, the market value of this property increased by 7.91%. Calculate the composite return. (Please type your answer in decimals and round your answer to four decimal places. For example, 10.11% should be 0.1011.)

The measurement of both the net income return and the growth/decline in value over a single period is called a composite return. Composite return= The correct answer is: 0.2279

Which is the highest form of land ownership in New Zealand? Select one: a. Leasehold. b. Freehold. c. Cross lease. d. Unit title. e. Company title.

b

When allowing for changes in property value as well as income in calculation of a single period return: Select one: a. Change in value is multiplied by income and the product is divided by the initial property value. b. Income is divided by the final property value. c. Change in value is added to income and the product is then divided by the initial property value. Correct. d. Change in value is divided by income. e. Economic indicators are used to value the property.

c

The internal rate of return of a property investment: Select one: a. will always exceed the required rate of return b. will always be less than the required rate of return c. makes the net present value equal to zero d. reduces as the discount rate increases e. increases as the discount rate increases

c See Techniques of investment evaluation in Chapter 12, and the study guide (multi period methods in Week 11). The correct answer is: makes the net present value equal to zero

Real estate markets are considered to be imperfect because Select one: a. Buyers and sellers are not always well informed b. Each property is relatively unique c. There is imperfect competition for any one property d. All of a, b, and c e. Some buildings are not readily reproduced

d

Which of the following is NOT a feature of a perfectly competitive market? Select one: a. knowledgeable buyers and sellers b. a homogenous and divisible commodity c. competitive, arm's length bidding process d. high transaction costs e. zero information costs

d

Which of the following is NOT an example of an easement? Select one: a. A property benefiting from stormwater pipes to provide drainage through another property. b. A property benefiting from sewer pipes to provide wastewater disposal through another property. c. Adjoining properties each benefiting from a party wall. d. A restriction that indicates there is uncertainty as to where the boundary lines are. e. All of the above are examples of easements.

d

Which of the following is true? Select one: a. The bundle of rights is indivisible. b. Property ownership rights are absolute. c. Restrictive covenants are examples of government controls placed on real estate. d. Zoning is an example of a government restriction.

d See the Study Guide: Week 6 Property Rights and Ownership. The correct answer is: Zoning is an example of a government restriction.

Which of the following statement(s) indicate that real estate is NOT a perfectly competitive market? Select one: a. Pricing information is poor and not quickly disseminated b. Transaction costs are low c. Property is a heterogeneous product d. Property is a homogenous product e. Both A and C indicate that real estate is not a perfectly competitive market

e

With a _____ the lessor is responsible for all building operating expenses, whereas with a _____, the lessee is responsible for part or all of building operating expenses. Select one: a. ground lease; gross lease b. freehold ownership; leasehold arrangement c. tenacy in common; joint tenancy d. capital lease; income lease e. gross lease; net lease

e

An easement gives the owner of one property the legal use of another property Select one: True False

true