Commerical and Investment Properties

A property is generating $100,000 in income and has expenses of $25,000. The investor pays $3,000 toward mortgage principal each year and $32,000 toward interest, plus another $4,000 in income taxes. What is the before-tax cash flow?

$40,000 --------- 25,000 + 3,000 + 32,000 = 60,000 100,000 - 60,000 = 40,000

Which section of the Internal Revenue Code allows the owner of real property to sell that property, then reinvest the proceeds in a "like-kind" property and defer paying any capital gains taxes?

1031

Bob just closed on his investment property. He's already identified a replacement property that he'll be exchanging into by using a 1031 tax-deferred exchange. How many days does he have to close on his replacement property?

180

John wants to do a 1031 tax exchange. He just sold his property. How many days does he have to close on a new property?

180 days

Tyrell and Barb bought a commercial investment property in 2009 during the real estate market downturn. Through what year will they be able to depreciate the investment?

2048 Commercial property depreciates over 39 years

Your client Joseph has a commercial income-producing property. How long does he depreciate this property?

39 years

Gary, your investor client, has an annual net income of $50,000. His annual debt service is $12,500. What is his debt coverage ratio?

4.0 (NOI divided by Annual Debt Service= DCR)

John wants to do a 1031 tax exchange with a property he just sold. How many calendar days does he have to identify a new property for the exchange?

45 days

Breeja sold her investment property for $330,000. Her adjusted basis in the property was $253,000. The difference between this sale price and the adjusted basis is ______.

A capital gain

Which of the following is an intangible asset?

A company's reputation for excellence

What's an income shelter?

A deductible allowance from net income

What type of gain is considered long term?

A gain on a property owned more than one year

What type of capital gain is considered short term?

A gain on a property owned one year or less

Which of the following belongs in the commercial category referred to as retail?

A gift shop in a shopping center

Which of these is NOT considered a residential property?

A hotel with fewer than 20 rooms

What type of professional must an investor use to conduct a tax-deferred exchange?

A qualified intermediary

What is a major advantage of real estate investment over other types of investment?

Ability to leverage

What is a reverse exchange?

An investor finds and closes on an investment property and then decides to immediately sell another investment property.

What can tax losses be used to offset?

Both passive and active income

The numbers on the residential apartment building Tony bought looked great on paper. However, expenses have been far more than what he originally budgeted. This is an example of what type of risk?

Business

In the sale of a business, which generally involves 12 steps, something happens with the assets early in the process. What is it?

Business assets are separated from personal assets.

What is the definition of "before-tax cash flow"?

Cash flow before taking income taxes into account.

A comparison of before-tax cash flow to cash invested is known as ______.

Cash-on-cash return

Which method of estimating a business's value considers the sales prices of similar businesses and accounts for basic differences to arrive at a market value?

Comparable sales analysis

Which of the following is an example of a residential property?

Condo

In a 1031 tax-deferred exchange, what role does the qualified intermediary serve?

Coordinates the exchange

Real estate investing may be done individually, in partnerships, or through what other means?

Corporations

Investors may be allowed to deduct operating expenses, real estate taxes, mortgage interest, and what else?

Depreciation Allowable deductibles include depreciation, operating expenses, real estate taxes, and mortgage interest

John sold his single-family home and purchased a new home for his family. Marcus rented his single-family home to a co-worker while he was on an extended two-year military tour overseas. Donald sold an apartment complex and purchased a new complex in a different part of the city. Which of these consumers is most likely to take advantage of a 1031 tax-deferred exchange?

Donald

Which of the following could an investor who sells an apartment house buy using a 1031 exchange?

Duplex, office building, or warehouse

In investments, each type of depreciation is defined by a particular event. Which of the following best describes a depreciation type and an event it's tied to?

Economic depreciation and physical deterioration

It's Saturday, and Janet and Kim are off to their favorite shopping area to see who can find the best deal. Their destination is a retail space located outside a main shopping area offering name brands at discount prices. What kind of retail area will Janet and Kim be visiting?

Factory outlet

Daniella's rental property is barely covering her expenses. Two of her six tenants have moved out, and she has had to upgrade the building's heating and air conditioning systems. This is an example of which type of risk at work?

Financial

Which of the following statements related to 1031 tax-deferred exchanges is true?

Foreign investors may participate.

Which kind of industrial property is typically located away from residential and central commercial areas?

Heavy Industrial

Which method to estimate a business's value examines the ability of the business to generate income?

Income analysis

What is the name for a type of asset which cannot be touched?

Intangible

Which one of the following statements about investors and tax depreciation is true?

Investors can depreciate an appreciating asset. Depreciation of investment properties allows investors to depreciate an appreciating asset and use the depreciation as a business deduction. Depreciation is limited to investment properties. Improvements can be depreciated; land itself cannot.

What advantage does the 1031 tax-deferred exchange offer?

It allows investors to defer capital gains taxes when selling a property, provided they buy another property.

What is a participation mortgage?

It allows the lender to participate in the project by investing funds and realizing a return.

Andrea, a commercial developer, is planning to build an apartment complex on a lot in Miami and is using the land, pledged to the lender as an estate for years, as collateral for the loan. What type of mortgage is this?

Leasehold mortgage

What is borrowing money to finance an investment known as?

Leverage

Poor Sarah! John has died and she no longer wishes to continue with their custom cabinet business, SJ Cabinets. John made the cabinets, after all! She wants to sell off all of their assets and inventory instead of selling the business itself. What method would most likely be used to estimate the value of SJ Cabinets?

Liquidation analysis

Which of the following is a term that describes how easy it is to get your money out of an investment by selling it or converting it into cash?

Liquidity

Which type of retail space has an anchor store and commonly has approximately three miles of trade space, often has service businesses, such as dry cleaners, hair salons, and convenience stores?

Neighborhood center

Flynt has a loan for a shopping center and is required to pay not only his mortgage payment but a percentage of the income he earns from the shops. What kind of a mortgage is this?

Participation

What type of real estate investment must distribute 95% of its income to beneficiaries?

Real Estate Investment Trust

What does a *mortgage* real estate investment trust invest in?

Real estate DEBT*

What type of real estate investment may meet the definition of being a security and must adhere to the rules and regulations of the Securities and Exchange Commission?

Real estate syndicate

A duplex is what type of property?

Residential

The chance that an investor might lose money is known as _______.

Risk

What type of investment strategy is most similar to a 1031 tax-deferred exchange?

Rolling over funds from one IRA into another

Cassandra is a business opportunity broker. Which of the following must be true?

She primarily deals with the sale and purchase of smaller businesses As a business opportunity broker, Cassandra primarily deals with smaller businesses, like sole-proprietors or partnerships, with limited amounts of fixed assets.

What types of capital gains may property owners encounter?

Short and long-term

Blane owns a barbershop. He polls his customers and learns that they tend to come from less than a mile away. That's probably because Blane's store is in which type of location?

Strip mall

Sharilyn's business and adjacent businesses are arranged in a neat row. Customers enjoy the open-air walkways when they visit her business and others. In which commercial space is Sharilyn's business likely located?

Strip malls

A like-kind exchange, or 1031 exchange, is also referred to as a ______.

Tax-deferred exchange

Luther is analyzing an investment property. During his analysis, he looks at environmental sensitivity, political climate, the potential for a development moratorium, economic downturns, etc. What is Luther demonstrating?

That risks involved with real estate investments need to be analyzed

Which one of the following is a description of economic depreciation?

The asset is worth less because the economy took a downturn

Which valuation method estimates the value of all types of improvements in order to determine how much it would cost to exactly duplicate the business?

The cost approach

The Siegels are purchasing a commercial investment property and plan to use straight-line depreciation on their financial statements and tax calculations. Which of the following would NOT be included in the Siegels' depreciation basis calculations?

The loan origination and lender fees that they paid at closing The depreciable basis is made up of the sales price plus any acquisition costs, such as title insurance, and capital improvements. Loan costs aren't included in the basis, but something like electrical system upgrades are capital improvements.

What is the 95% rule as it relates to tax-deferred exchanges?

The total value of the property (or properties) being exchanged is at least 95% of the value of the property being sold.

Which of the following statements is true of investment properties?

They can be leveraged.

Julie and Tim have inherited some money. They have decided to purchase some agricultural land as an investment. Which of the following is true?

They may have a long holding period.

Why are residential properties popular with investors?

They're always in demand

Aside from cash flow, appreciation, and earning passive income, what is another reason someone may want to legally invest in real estate?

To hedge against inflation

Jennifer is the owner of the single-family residence in which she resides. How long can she take to depreciate her property?

Zero years (personal residences cannot be depreciated) Depreciation is limited to investment properties. Owners can't depreciate a personal residence or vacation home.

Jose is an investor who found and closed on an investment property, then decided to sell a property other than the one originally marked for the exchange. What is this an example of?

reverse tax-deferred exchange

What does income shelter mean?

t means that the income received is sheltered from taxation.

What is one fundamental difference between real estate brokerage and business brokerage?

Business brokerage may or may not involve real estate

Sally is helping her Aunt Jess shop for another rental property. Aunt Jess likes to reminisce about the "good old days" when everything cost less. "Your Uncle Floyd and I bought our first rental property for $80,000 and that was a nice house. It was new, too. You couldn't touch that house for less than $250,000 today. Times change, huh, honey?" Aunt Jess is referring to which kind of investment risk?

Buying power

During periods of inflation, $10,000 today will be worth less tomorrow. This is an example of what type of risk?

Buying power Inflation affects buying power. As inflation rises, so do costs, which means that you can buy more today with that $10,000 than you could during a period of inflation in the future.

Which of the following is the best example of investment leverage?

Financing most of an investment and putting very little cash in

Trent works for a well-known motorcycle manufacturer in its powertrain operations facility. He loves being around all of the heavy machinery and seeing the bikes come off of the production line. What type of space does Trent work in?

Heavy industrial

Which valuation method estimates the proceeds that can be generated as a result of selling all assets and inventory and paying off short-term liabilities?

Liquidation analysis

John works in an industrial park on the outside of town. He loves his job because he doesn't have to commute, and he gets to drive a forklift all day. The company he works for stores its inventory in this off-site location prior to shipping it out to customers. What kind of industrial space does John work in?

Loft/warehouse building

Anthony lives in a two-story apartment building. What type of building is it?

Low-rise

A steel plant is an example of which commercial property category?

Manufacturing

In which commercial category are raw materials converted into useful objects?

Manufacturing

What are the two types of real estate investment trusts?

Mortgage and equity