Texas SAE: Real Estate investment

Nondisturbance:

Notifies tenants that they won't be evicted if they meet lease terms.

Subordination:

Notifies the tenant that the lease is subject to a mortgage.

Attornment:

Notifies the tenant that the lease will still be in effect even if building ownership changes.

Sublease/assignment:

Notifies the tenant whether sublease or assignment is permitted.

Strip malls/strip centers:

Offer a variety of shops, services, and commodities and have one anchor tenant.

Regional/super-regional shopping centers or malls:

Offer a wide variety of general merchandise and fashion and have two or more anchor tenants.

Community shopping centers:

Offer anywhere from 15 to 40 stores (clothing and shoe stores, large appliance stores, drug stores, home improvement/furnishing stores), generally two anchors, and serve a trade area of approximately three to six miles.

Factory outlets:

Offer brand name goods at a discount.

Neighborhood shopping centers:

Offer necessary goods and services to meet the needs of people who live in the immediate area and have one anchor tenant.

Simple interest

Principal x Rate x Time = Simple Interest

Single lots:

Residential lots and build to suit

Five or more units (GIM)

Sales Price / Annual Gross Income = gross income multiplier (GIM)

One to four units (GRM)

Sales Price / Monthly Gross Rent = gross rent multiplier (GRM)

Capital gains short-term

Short-term gain taxed like ordinary income.

Recaptured depreciation:

The sales price of a depreciated asset is more than the tax basis or adjusted cost basis. The difference is a gain on the sale of a depreciated asset that must be reported as income on the investor's tax return

Recaptured depreciation:

The sales price of a depreciated asset is more than the tax basis or adjusted cost basis. The difference is a gain on the sale of a depreciated asset that must be reported as income on the investor's tax return.

Percentage lease:

The tenant pays base rent plus a percentage of gross sales.

Net lease:

The tenant pays rent plus some of the property expenses separately.

Resident manager:

Usually lives on site and may work for a real estate broker, managing agent, or owner.

Building manager:

Usually manages a single large property and may work as an employee.

Estoppel:

Verifies facts already in writing.

Add-on interest

[(2 x number of yearly installments) x total interest charges] / [principal x (total number of installments + 1)] = Add-on Interest

In order for an active investor to qualify for a $25,000 deduction, the investor has to have an adjusted gross income of ____________________. a. $100,000 or less b. $150,000 or less c. $200,000 or less d. $250,000 or less

a. $100,000 or less The investor has to have an adjusted gross income of $100,000 or less to qualify for the $25,000 deduction.

Ezra has filed a fair housing discrimination complaint against an investor. HUD is investigating. Within how many days of receiving the complaint does HUD have to respond? a. 100 b. 30 c. 60 d. 90

a. 100 Within 100 days of receiving the compliant, HUD will investigate and determine whether reasonable cause exists to bring a charge of illegal discrimination against the alleged offender, or it will dismiss the case.

What does "cash-on-cash return" mean? a. A comparison of before-tax cash flow to cash invested b. Making money hand over fist c. Net income after taxes are deducted d. Trading international currency

a. A comparison of before-tax cash flow to cash invested **Cash-on-cash return is a ratio or percentage. It compares before-tax cash flow to cash invested.

What type of financing can be used for a purchase, or a significant remodel or improvement, including building on vacant land? a. Acquisition b. Construction c. Home equity d. Subsequent

a. Acquisition **This is known as acquisition financing.

Lyn runs a brokerage and maintains a master file for all the office transactions. The file must be maintained for how long? a. As long as Lyn's state requires b. One year c. Seven years d. Three years

a. As long as Lyn's state requires **All files must be maintained on state law requirements.

Investors who maintain strong relationships with local ________ will have a source of information about market trends, such as what cap rates local investors are willing to accept. a. Commercial real estate lenders b. Government officials c. Property managers d. Real estate investment bloggers

a. Commercial real estate lenders **Lenders who work with commercial properties will have the most current knowledge of trends in cap rates.

If TVC has $450,000 in assets, $75,000 in debt, and $330,000 in equity, which of these ratios are correct? a. Debt-to-Asset, 17%; Debt-to-Equity, 23%, Debt-to-Capital, 19% b. Debt-to-Asset, 17%; Debt-to-Equity, 23%, Debt-to-Capital, 35% c. Debt-to-Asset, 17%; Debt-to-Equity, 26%, Debt-to-Capital, 22% d. Debt-to-Asset, 19%; Debt-to-Equity, 17%, Debt-to-Capital, 23%

a. Debt-to-Asset, 17%; Debt-to-Equity, 23%, Debt-to-Capital, 19% Debt-to-Asset = $75,000 ÷ $450,000 (17%); Debt-to-Equity = $75,000 ÷ $330,000 (23%), and Debt-to Capital, $75,000 ÷ ($75,000 + $330,000) (19%)

What could discolored soil, soft spots, or mounds on the land indicate? a. Former waste disposal site b. Historical district c. Natural hazard d. Underground storage tank

a. Former waste disposal site These are clues that the property may have been used as a waste disposal site.

What type trust allows the trustor to receive income from the property that is held in the trust? a. GRIT b. Living trust c. REIT d. Testamentary trust

a. GRIT **A GRIT, or grantor retained income trust, allows the trustor to continue to receive income from an income generating property while it remains in trust.

Who is the withholding agent under Foreign Investment in Real Property Tax Act? a. The buyer b. The buyer's lender c. The seller d. The seller's real estate broker

a. The buyer **The buyer must withhold the tax or they could be liable for it.

What's a legal agreement or promise made between two parties? a. A consideration b. A covenant c. A handshake d. A negotiation

b. A covenant A legal agreement or promise made between two parties is a covenant.

The direct capitalization method would be a good choice of appraisal method in which of the following situations? a. An apartment building in a very rural town where there are no other comparable investment properties. b. An apartment building that has consistent income and expenses year after year. c. A property in which the sale is contingent on its ability to produce a particular level of income for the next 10 years. d. A property which has experienced roller coaster-like ups and downs in income and expenses.

b. An apartment building that has consistent income and expenses year after year. Direct capitalization is most effective for investment properties where the income and expenses are consistent year after year.

Which of the following statements about state fair housing laws is true? a. Although states are encouraged to implement their own fair housing laws, they aren't required to do so. b. Each state is responsible for establishing and implementing its own fair-housing regulations. c. Generally, state fair housing regulations tend to be narrower in scope than the federal laws. d. State fair housing laws aren't required to contain the same seven protected classes as the federal law.

b. Each state is responsible for establishing and implementing its own fair-housing regulations. **Each state is responsible for establishing and implementing its own fair-housing regulations. Generally, these regulations tend to be broader in scope than the federal laws. However, each state's fair housing law must contain at least the seven protected classes as the federal law.

Which REIT type specializes in owning certain building types, such as apartments or office buildings? a. Commercial cap b. Equity c. REMTs d. Tax-deferred

b. Equity **Equity REITs invest in specific building types, such as apartments, shopping malls, self-storage facilities, office buildings, and hotels.

Gary leases a commercial building and pays all expenses related to the building, including taxes and insurance. Gary has a ______. a. Gross lease b. Net lease c. Percentage lease c. Sublease

b. Net lease **With a net lease, the tenant pays some, or all (in the case of a triple net lease), expenses.

What is financial risk? a. The risk that an investor cannot secure financing at an affordable rate b. The risk that is directly related to leverage c. The risk that the property has a bad location d. The risk that the required return on investor capital will not be met

b. The risk that is directly related to leverage **The more money an investor leverages (or borrows), the greater the financial risk.

Steven put down $10,000 toward a property's purchase price, financed the rest, and now has a cash flow of $2,800 after repairs and debt service. What's his ROI? a 21% b 26% c 28% d 32%

c 28% Return on investment or ROI = cash flow ÷ cash investment. $2,800 ÷ $10,000 = 28%.

Which class of office building has adequate systems that are fair to good for the area? a. Beyond class category b. Class A c. Class B d. Class C

c. Class B **Class B office buildings can't command the same prices as Class A buildings because they are rated as only fair to good for the area.

How do you calculate maximum equity? a. Divide annual debt service cost by loan factor b. Divide annual NOI by debt coverage ratio c. Divide cash flow by desired rate of return d. Subtract annual debt service cost from annual NOI

c. Divide cash flow by desired rate of return **To calculate maximum equity divide cash flow by desired rate of return.

Which of these is a static risk? a. A decline in economic conditions in the area b. Change in tax code c. Fire damaging the building d. Market change

c. Fire damaging the building **Static risks are those where the effect can be lessened with insurance. This includes vandalism, theft, fire, and accident liability.

Adjustable rate mortgage interest rates are often linked with a recognized ______. a. Bank b. Government entity c. Index d. Public figure

c. Index **ARM interest rates are often linked with a recognized index, such as U.S. Treasury securities.

What is the formal action to impose the property tax? a. Ad valorem basis b. Appropriation c. Levy d. Ordinance

c. Levy **A levy is the imposition of a tax. You've probably heard the term "tax levy." That simply means the tax imposed.

Which of the following is a passive type of real estate investment? a. Buy and hold b. Fix and flip c. Limited partnership d. Wholesale

c. Limited partnership **Limited partners are passive investors who invest funds, but don't get involved in the day-to-day activities related to the business.

A(n) ______ budget helps property managers maximize profitability and avoid unforeseen major expenses and repairs. a. Cash reserve b. Expense c. Operating d. Stabilized

c. Operating The operating budget helps managers maximize profitability and avoid unforeseen major expenses and repairs.

Which type of legal structure may be either general or limited in type? a. Corporation b. Limited liability corporation c. Partnership d. Sole proprietorship

c. Partnership Partnerships are a common legal structure and may consist of general and limited partners.

A neighborhood that has been disintegrating for some time is undergoing a rejuvenation, with several properties on one block being heavily renovated or entirely rebuilt. As a result, even the properties that are still old and shabby increase somewhat in value. This is the principle of ________. a. Anticipation b. Conformity c. Progression d. Regression

c. Progression **The principle of progression says that a lower-value property gets a bump in value by being near a higher-value property.

Which of the following is a true statement regarding property taxes and investments? a. As much as 50% of the property taxes paid for investment properties are deductible for tax purposes. b. Only the first $10,000 of property taxes for investments are deductible. c. Property taxes for investment properties are fully deductible as a business expense. d. Property taxes paid for investment properties aren't deductible for tax purposes.

c. Property taxes for investment properties are fully deductible as a business expense. **Property taxes for investments are fully deductible as a business expense.

Which type of commercial property offers parking surrounding the outside of the property, but also indoor parking beneath the building? a. Community shopping center b. Neighborhood shopping center c. Regional shopping center d. Strip store

c. Regional shopping center **Regional shopping centers are usually enclosed, with stores facing inward and connected by a common walkway. Parking is available surrounding the outside of these centers, although some have indoor parking beneath the building, as well.

Samuel is selling a 99-lot subdivision across state lines. His rival, Max, has a 123-lot subdivision that he's selling across state lines. What must Max do that Samuel doesn't have to do? a. Follow local building codes, as well as the codes in the states where he's selling. b. Get permission from the local community for the development. c. Register the project with the Consumer Financial Protection Bureau. d. Set aside at least 10% of proceeds for the Foreign Sellers of Real Property tax.

c. Register the project with the Consumer Financial Protection Bureau. **The Interstate Land Sales Full Disclosure Act requires developers of 100 or more lots who sell between states to register with the Consumer Financial Protection Bureau, and provide certain disclosures to buyers. Its purpose is to protect buyers from fraudulent sales of land that's purchased sight unseen.

In order to entice tenants to sign a lease agreement with her, Margo is offering to decrease the tenant's first two months' rent. What type of concession is this? a. Illegal b. New signing c. Rental d. Temporary

c. Rental **Rental concessions can sometime mean a decrease in rent, or even free rent, for a certain amount of time.

Which statement describes the purpose of the Interstate Land Sales Full Disclosure Act? a. To help state governments control growth. b. To increase special assessments in areas of development. c. To protect consumers from fraudulent purchases. d. To provide consistent laws for real estate licensees who work in more than one state.

c. To protect consumers from fraudulent purchases. **The act requires registration with the Consumer Financial Protection Bureau, and disclosure to buyers. Its purpose is to protect buyers from fraudulent sales of land that have been purchased sight unseen.

Your client, Gabriel, has invested in a rental property. He looks at his property's operating statement, tweaks the numbers based on his knowledge of the market, and re-works the statement. Gabriel has created ______. a. A debt service statement b. A gross income statement c. An operating income statement d. A pro-forma statement

d. A pro-forma statement Remember that Gabriel is changing the numbers of the operating statement based on his knowledge of the market.

What's a land banker? a. A financier of raw land b. An appraiser who works with lenders to value raw land c. An investor who buys land, develops it, and leases it d. An investor who holds land in inventory

d. An investor who holds land in inventory **A land banker holds improved land or lots in inventory, banking on appreciation.

Ken, Barbie, and Skipper owned a property as a joint tenancy. When Skipper moved out of state, she sold her interest to Midge. Two years later, Ken died. How is the interest in the property divided? a. Barbie and Midge each own 50%. b. Barbie and Skipper each own 50%. c. Barbie, Midge, and Ken's heirs each own one-third. d. Barbie owns two-thirds, and Midge owns one-third.

d. Barbie owns two-thirds, and Midge owns one-third. Joint tenancy includes the right of survivorship, so Ken's interest will pass to the other tenants. But because Midge bought in later than the others, she isn't considered a joint tenant. Ken's share will therefore pass entirely to Barbie.

Honey is the seller in an installment sale of a residential property. She is paying her capital gains tax through installment sale deferment, and her installment obligations at the end of the tax year will be less than $5 million. Given her situation, which one of the following statements is true? a. Honey is a dealer. b. Honey may be subject to tax on gains at the ordinary income rate at the time of sale. c. Honey must pay the capital gains tax in full at sales time. d. Honey will only pay taxes proportionate to the gain collected each year.

d. Honey will only pay taxes proportionate to the gain collected each year. Through installment sale deferment, Honey will pay taxes proportionate to the gain collected each year. Her installment obligations will be less than $5 million, so she won't be subject to taxes on gains at the ordinary income rate at the time of sale.

What type of deed are you likely to receive if you purchase a property with cash at a foreclosure auction? a. Bargain and sale deed b. Executor's deed c. Full covenant and warranty deed d. Referee's deed

d. Referee's deed **You are likely to receive a referee's deed from purchasing the property at a foreclosure auction.

Beth, a condominium owner, wants to sell her condominium. What rule might apply before she is able to do this? a. Beth must allow the original developer the option to purchase her condominium when it's placed for sale. b. If Beth purchased after the builder or owner reached the non-owner occupancy maximum, she must wait 18 months to sell. c. If Beth purchased after the builder or owner reached the non-owner occupancy maximum, she must wait six months to sell. d. She must allow the board of directors the option to purchase the condominium when it's placed for sale, if the condominium agreement includes the right of first refusal.

d. She must allow the board of directors the option to purchase the condominium when it's placed for sale, if the condominium agreement includes the right of first refusal. **Many times, the board of directors will retain the right of first refusal on units within the condominium development.

Which corporate structure avoids double taxation? a. C corporation b. General corporation c. Limited corporation d. Subchapter S

d. Subchapter S **By being taxed as a partnership, Subchapter S avoids taxation at both the corporate and individual levels.

Offerings for promotional land sales must include ________. a. A single, one-page document with a terrain map and a description of any issues only b. Only a basis for guarantees c. Photo of the property and any existing improvements only d. Tax liabilities, basis for guarantees, information on public transportation, terrain details, proposed and existing improvements, and any issues with terrain

d. Tax liabilities, basis for guarantees, information on public transportation, terrain details, proposed and existing improvements, and any issues with terrain Offerings for promotional land sales must include tax liabilities, basis for guarantees, information on public transportation, terrain details, proposed and existing improvements, and any issues with terrain.

A grantor retained income trust is a type of trust that allows what? a. A deceased person's last wishes to be carried out b. Pass-through tax benefits c. The avoidance of probate d. The grantor to receive income

d. The grantor to receive income **GRIT trusts allows the grantor to continue to receive the income from a property while it's held in trust.

During the option period to renew a lease, who determines whether the option will be exercised? a. Either the landlord or the tenant can make the decision. b. It must be mutually agreed to by both the landlord and the tenant. c. The landlord makes the decision. d. The tenant makes the decision.

d. The tenant makes the decision. **When there's an option period in play, the lease can be renewed at the sole discretion of the tenant. The landlord has no say in whether the option will be exercised (or not).

An appraiser is using the direct capitalization method to calculate a value for an investment property. Which of the following is true? a. The subject property's income is expected to vary a lot over time. b. This method considers anticipated resale value. c. This method considers future income streams. d. This method converts a single year's expected income into a market value.

d. This method converts a single year's expected income into a market value. **The direct capitalization method converts a single year's expected income into a value. It doesn't consider future resale value or future income streams, and is primarily used with properties where yearly income doesn't vary a lot over time.

Which statement correctly identifies a federal fair housing law and what it addresses? a. The Civil Rights Act of 1866 made it illegal to discriminate on the basis of age and gender. b. The Fair Housing Act of 1968 attempted to eliminate discrimination based on gender. c. The Housing and Community Development Act of 1974 added marital status to the list of protected classes. d. Title VIII of the Civil Rights Act of 1968 prohibits housing discrimination based on race, color, national origin, and religion.

d. Title VIII of the Civil Rights Act of 1968 prohibits housing discrimination based on race, color, national origin, and religion. Title VIII of the Civil Rights Act of 1968 (aka the Fair Housing Act) prohibits housing discrimination based on race, color, national origin, and religion.

How many dwelling units does a multi-family residential property have? a. Five or more b. More than one but fewer than six c. One to four d. Two or more

d. Two or more **A multi-family residential property has two or more dwelling units.

Victims of fair housing discrimination can seek redress in federal court. Within how many years of the alleged violation do they have to do so? a. Four years b. One year c. Three years d. Two years

d. Two years **Victims may seek redress in federal court within two years of the alleged violation. There is no limit on the amount of punitive damages that may be awarded to a victim in federal court.

Income tax shelters for single-family detached homeownership:

-Acquisition: Points deduction and penalty-free early IRA distribution for first-time homebuyers -Ownership: Property tax and mortgage interest deductions -Reversion: Tax breaks and capital gains or losses

Managing office buildings:

-Class A building: Prestigious -Class B building: Fair to good -Class C building: Functional with below-average rent -Investors need to be aware of the requirements in the Americans with Disabilities Act (ADA) Title 1, which deals with employment requirements, and Title III, which is concerned with accessibility of public accommodations.

Group ownership

-Corporation (S or C) -Partnership (general or limited) -Limited liability company (LLC) -Limited liability partnership (LLP) -Joint venture -Syndicate

Income tax shelters during reversion:

-Depreciable basis -1031 tax-deferred exchanges -Net loss

Individual ownership

-Estate in severalty -Tenancy by the entirety -Tenancy in common -Joint tenancy -Community property -Dower and curtesy rights

Active investments include:

-Fix and flop -Buy and hold -Wholesaling -Commercial -Development -Owner-user

Disadvantages of real estate investing:

-High risk -Illiquidity -High capital requirements -Handling tenants -Need for constant managemen

Fair housing:

-Investors who own three or fewer single-family homes and don't use real estate licensees to assist in the sale of property are exempt -Owners of two- to four-unit multi-family homes who live in one of the units and don't use real estate licensees to assist in the sale are exempt.

Evaluating land for investment:

-Land bankers improve raw land for construction or hold improved land in inventory. -Interstate land sales regulations (administered by Consumer Financial Protection Bureau, or CFPB) say that 100 or more non-exempt lots must be registered. -Consider subdividing for speculation versus subdividing for development.

Income tax shelters during ownership:

-Mortgage interest deductions -Property tax deductions -Write-offs of expenses -Depreciation (residential 27.5 years; non-residential 39 years)

A savvy real estate investor has the following traits:

-Persistent -Takes risks -Makes decisions using educated analyses -Sets clear goals -Treats investing as a business -Selects a strategy and market to focus on -Studies the market -Behaves ethically -Develops an exit strategy

What to look at for investment feasibility:

-Property location and features, including access to major roadways and proximity to employment hubs -Timing of investment, including holding period options, dead money, and tenant farmers -Community acceptance, such as the existence of no-growth policies or the ability to secure permits

Passive investments include:

-Real Estate Investment Trusts (REITs) -Limited partnerships -Mutual funds with mortgage-backed securities

Advantages of real estate investing:

-Tax sheltering ability -Potential for high yields -Opportunity to leverage other people's money -Personal control over investment

Trust ownership

-Testamentary trust -Living trust -Grantor retained income trust (GRIT) -Investment trust -Real estate investment trust (REIT) -Real estate mortgage trust (REMT)

Lease clauses:

-Use -Subordination -Nondisturbance -Attornment -Estoppel -Sublease/assignment

Capital gains investment income tax

3.8% investment income tax may also apply

Individual property manager:

A real estate licensee who manages properties for one or more property owners, lives off site, and tends to work as an independent entity, not an employee.

Types of income:

Active: Earned Passive: Rentals, businesses Portfolio: Dividends, interest

Gross lease:

All expenses covered by rent.

Capital gains tax:

Applies to the investor's tax return.

Transfer tax:

Assessed at the time of sale.

Compound interest

Beginning Deposit or Principal x (1 + interest rate per period) number of periods = Compound Interest

Capital gains exclusions of $250,000 per individual and $500,000 filing jointly.

Capital gains exclusions of $250,000 per individual and $500,000 filing jointly.

Acreage:

Consider plottage and assemblage

Use

Determines how tenants may use the space.

Gross income:

Income received before deducting operating expenses Gross income - operating expenses = NOI

Gross Income

Income received before deducting operating expenses Gross income - operating expenses = net operating income

Loft lease:

Lease of open space.

Capital gains long-term

Long-term gain taxed at a lower rate.

Speculative lots:

Multi-family and commercial use potential; rezoning potential