Real Estate Principles II - Unit 9 - test

Scenario Jack Anderson, an agent with Commercial First Real Estate, is transitioning from residential real estate brokerage to commercial real estate primarily working with investors. Bill Scott, Jack's current investor/client, has owned four rental houses for a number of years and now wishes to upgrade these older rentals. Bill thinks that 311 Winterwood Drive has the most equity and asks Jack to give him a market value for the property. Jack determines that Bill has about $85,000 equity in the house and assures Bill that he can sell it quickly. Bill mentioned that he had heard something about trading houses to avoid paying capital gains taxes and asked Jack what he knew about that. Jack replied that most sellers did not want to take a house in trade and that he did not think that would work very well. Bill then asked what if I sell Winterwood and immediately reinvest all of the funds in the replacement property. Jack thought that should work. Jack listed the Winterwood property and it sold very quickly releasing Bill's equity to purchase a better property.

**a. Since Jack is transitioning to commercial real estate working with investors, he should have a mentor or someone from whom to get advice. b. Jack gave Bill good advice when he told him that most sellers won't trade homes and that if Bill sells Winterwood and immediately reinvests the proceeds, he will avoid taxes on the sale. **c. Bill will have to pay capital gains taxes on the sale of Winterwood. **d. When Bill asked Jack tax questions; Jack should have referred Bill to Bill's CPA. Hint: Jack should have referred Bill to Bill's CPA when asked the tax question. The answer Bill needed was that he should do a 1031 exchange as long as his CPA agrees with that. Regarding Statement 3, TREC Rules and Regulations state that an agent should be competent in their chosen real estate practice. "The agent should be informed on market conditions affecting the real estate business and pledged to continuing education in the intricacies involved in marketing real estate for others... exercise judgment and skill in the performance of the work." Jack clearly needs more education to better serve his investor clients.

A real estate investment trust (REIT) must pay out at least _____ of its income in dividends to unitholders.

90%

What entity holds a fixed pool of real estate mortgages and distributes ownership interest issues multiple classes of interests in itself to investors under federal income tax law?

A real estate mortgage investment conduit

Which of the following is a limitation of a real estate mortgage investment conduit (REMIC)?

Allowable activities are limited to holding a fixed pool of mortgages and distributing payments currently to investors

Which of the following is one of the most important tax benefits of income property ownership?

Depreciation allowance

Which high-risk investment strategy involves purchasing a home, refurbishing or remodeling it, and then reselling it for a profit?

Flipping

Which of the following is an advantage of a real estate mortgage investment conduit (REMIC)?

Have no minimum equity requirements

Which of the following is an advantage to investing in real estate versus securities?

Improvements can be made to real estate.

What are two unique features of real estate investment trusts?

Managing income-producing properties and dividend distributions

Which of the following is true regarding the relationship between real estate and the general economy?

Real estate and the economy both directly affect one another.

Which of the following allows investors to pool their funds for real estate investments and to participate in the cash flow and tax benefits associated with the entity that issues the security?

Syndication

All of the following are different syndication structures, except:

a. S corporations. b. limited partnerships. **c. initial public offerings. d. general partnerships.

All of the following are benefits of real estate syndicates, except:

a. deductions. **b. liquidity. c. capital growth. d. cash flow.

High risk can be associated with all of the following, except:

a. possibility of huge profits. **b. guaranteed profits. c. a two-edged sword. d. huge losses.

Real estate investing features all of the following characteristics, except:

a. tax benefits. b. leverage use. **c. liquidity. d. immobility.

Analyzing how much personal time an investment requires for maintenance refers to:

burden of management.

When an asset becomes difficult to convert to cash, it becomes:

illiquid

A __________ invests in real estate assets and also offers common shares to the public.

real estate investment trust

The __________ is the balance an investor must decide on between the lowest possible risk for the highest possible return.

risk and return balance