Unit 1 Real Estate Investment Introduction
Commonly, what range of annual returns do real estate investors earn?
10-15%
Martha has a life estate in a fourplex, with remainder to her son, Jacob. Jacob agrees to make and pay for upgrades during Martha's life, but he wants to be repaid his costs out of increased cash flows due to higher rents, and if the property sells during Martha's life, Jacob also wants to be paid for the value of his upgrades. How can that be done?
By using the principle of contribution
Why might a real estate property investor in an apartment building need to have a large sum of money to protect the investment in a property, even after it is producing a stream of income?
Changes in demand may increase the vacancy rate.
A developer builds game-day condos near the football stadium of a university town with a strong football heritage. The condos sell for an average of $1,000 per square foot, with construction and land costs averaging $600 a foot. The entire 120-unit project sells out in one hour at the launch reception. Fifteen other developers observe the huge profits and immediately begin looking for land for their own projects, with plans to develop a total of 3,000 units averaging 1,100 square feet, coming to market within 18 months. What is the likely outcome?
Decreasing profits The answer is decreasing profits. High initial profits act to attract new investors who wish to capitalize on the opportunities, and it is reasonable to assume that new construction will take place, regardless of costs. With new buildings available as additional inventory to satisfy demand, the market cycle will level temporarily and then start to fall until supply exceeds demand. At this point, the cycle has reached its valley, and conditions are those of a buyer's market.
Which governmental entity is the federal government's environmental watchdog?
EPA
Which of the following are included in the "bundle of rights" acquired when we acquire real estate?
Exclusion
How did the American Recovery and Reinvestment Act of 2009 support the real estate market?
Expansion of unemployment benefits
The interest rates paid by real estate investors are impacted by the monetary control imposed by the
Federal Reserve System
Which of the following indicates real estate that is permanently attached to the ground?
Fixity
A "buyer's market" indicates all of the following EXCEPT
High demand
Which of the following principles is fundamental to estimating the value in use of a real estate investment?
Highest and best use
Which of the following is NOT an advantage of real estate investing?
Low capital requirements
Which of the following approaches to value reflects the actual price that a knowledgeable buyer will pay?
Market value
At which stage in the real estate cycle is supply low and demand high?
Peak
At which stage in the real estate cycle is supply low and demand high?
Peak The answer is peak. The peak is characterized by a shortage of supply, high prices as a result of competitive bidding, and high concurrent profits for the seller.
From a rational point of view, an investor in real estate must consider all of the following analysis aspects EXCEPT
Pride
Why is real estate generally considered a long-term investment?
Real estate improvements are durable.
Which of the following is an example of a right of ownership of real property?
Rights to underground minerals
Which of the following is an example of a subset of a real estate market?
Shopping centers
A one-bedroom studio condominium in New York City has a higher value than a three-bedroom home in a distant suburb because of
The answer is effective demand. The economic worth of property fluctuates with the effective demand for strategically located and relatively scarce parcels of land.
Which of the following features is related to the market segmentation of real estate?
The market tends to be local.
What happened to the federal programs enacted to help borrowers following the Great Recession?
The programs have expired, but elements of each have been incorporated into other programs or resurrected to protect against another crash. The answer is the programs have expired, but elements of each have been incorporated into other programs or resurrected to protect against another crash. The elements that remain were incorporated to help prevent the financial conditions of the Great Recession. The Protecting Tenants at Foreclosure Act expired, but then was resurrected in 2018 and remains in effect.
Why is real estate considered a hedge against inflation?
The value of real estate tends to rise with the general level of other prices.
The valuation principle that takes into account changes from historic prices due to current over- or under-supply of product is called
balance. The answer is balance. The principle of balance identifies the problems that result from an oversupply or undersupply of a particular type of real estate. For example, too many condominium units of the same size, design and price in one area would act to depress the values of all of these properties within the market.
The rights of use, possession, control, enjoyment, exclusion, and disposition, including the right to pass the property on by means of a will, is (are)
bundle of rights The answer is the bundle of rights. When a person acquires real estate, they also acquire an accompanying bundle of rights in the property. These are the rights of use, possession, control, enjoyment, exclusion, and disposition, including the right to pass the property on by means of a will.
In 2006 and 2007, the real estate market suffered a downturn as property owners
could not afford their mortgage payments.
A disadvantage of being a landlord is
dealing with tenants' complaints.
Market value can differ from market price
due to emotional factors such as property stigma or fame. The answer is due to emotional factors such as property stigma or fame. Market value, as established by the seller, appraiser, or perhaps real estate broker, may different substantially from market price, which clearly is established by what the buyer will actually pay for the property. If a property has a famous former owner, or trendy new finishes, or supernatural phenomena, then emotional decision making can drive the price up or down varying from the value. Price is more in the real of behavioral economics, value is more in the realm of traditional economics.
A one-bedroom studio condominium in New York City has a higher value than a three-bedroom home in a distant suburb because of
effective demand.
The greater fool theory of investing
explains the critical importance of complete information in decision making.
The greater fool theory of investing
helps drive purchase decisions during a bubble. The answer is helps drive purchase decisions during a bubble. A bubble is a sharp rise in real estate prices, fueled by speculation among those who operate under the greater fool theory of real estate investing. The greater fool theory posits that whatever price is paid in a rapidly rising market, some fool will pay more to purchase it from the current owner. It typically works, until the inevitable market correction.
A buyer's market indicates all of the following EXCEPT
high demand.
Real estate investors may earn a profit through the increase of the property's value and its
income stream.
An investor in real estate cannot be certain how capital gains will be treated in the future, illustrating the risk presented by the unpredictability of the
income tax code.
One way for an investor or developer to minimize the effects of cyclical real estate markets is with
increased communication with other area investors and developers.
In a tight money market,
interest rates are high
In a tight money market,
interest rates are high. The answer is interest rates are high. A tight money market occurs when interest rates are high and loans are difficult to find.
As a result of the real estate characteristic of _____________, real estate investors can estimate the present value of a future stream of income.
longevity
One characteristic of real estate investments is
low liquidity
The owner equity in a real estate property increases when the value of the property remains the same or increases and the
mortgage debt is decreased.
Sustainability is based on the principle that everything we need for our survival and well-being depends, either directly or indirectly, on our
natural environment.
The low liquidity of an investment in real estate is demonstrated when
no one makes an offer on a property at any price.
An attribute that recognizes that real estate investment is long-term, complex, and often requires large sums of money is
permanence
One of the principal components of the demand for real estate is ______________
population The answer is population. Population does not only mean numbers of people, but also their subgroupings by age, income, and other factors.
The fundamental objectives of an investment in real estate are to earn a profit and
preserve capital
An example of the high level of personal control available to real estate investors is the ability to negotiate
purchase terms.
The slogan, "not in my backyard," is associated with individuals who oppose
real estate development.
People invest in real estate to preserve capital because
real estate values tend to increase over the long term.
The four components that define real estate market value are a knowledgeable buyer, a knowledgeable seller,
reasonable time for market exposure, and no duress or advantage on either side. The answer is reasonable time for market exposure, and no duress or advantage on either side. Market value is defined as that price which a knowledgeable buyer will pay and a knowledgeable seller will accept for a property that has been exposed for sale to the market for a reasonable length of time and with neither buyer nor seller acting under duress or enjoying any advantage, financial or otherwise.
As investor equity in real estate property rises, the investor may use the capital for additional investments by
refinancing.
It is the _______ that is most important to real estate as an investment vehicle.
relative scarcity of usable land The answer is relative scarcity of usable land. Relative scarcity is what establishes the basic value for real estate. The economic worth of property fluctuates with the effective demand for strategically located and, thus, by definition, relatively scarce parcels of land.
The tax advantage of long-term capitalized gains are realized for the real estate investor when the investor
sells the property.
The comparable sales approach to valuation of real estate depends on the principle of
substitution.
The real estate industry _________________ market segmentation.
suffers from The answer is suffers from. Market segmentation is a negative concept referring to the fractured aspect of this unorganized and largely unregulated market that is further complicated by a lack of standardization of the product and the prevalence of reliance on intuition for buying and selling decisions, rather than rational analytical tools. While members of the real estate industry might encourage or discourage portfolio diversification, that has nothing to do with market segmentation.
An investor purchased an apartment complex and spent two years upgrading the units and landscaping. When the investor sold the property, part of the profit could be attributed to
sweat equity.
Betterments are created by
tenants.
The owner of a commercial complex added improvements that increased the amount of the net operating income (NOI) of a property, which raised the
total value of the investment.
is at the end of a low cycle where supply and demand are nearly static. .
trough
Market value can differ from market price
when appraisers estimate market value and real estate agents estimate market price.