## Exam 102. Real Estate Investment Analysis

### Cap Rates Q4

If the Sale Price was \${a}, the Net Operating Income \${b} and the buyer deducted \$300,000 for urgent major repairs.

Calculate the True Cap Rate.

### Analysis Q1

This is the Net Cash Flow for a proposed office building investment for \$2,830,000. Answer the following questions below. (1 mark each) If the price was dropped by \$300,000 the Internal Rate of Return (IRR) would go {#1}

If \$250,000 was spent on the roof in year 3 the Net Present Value (NPV) would go {#2}

If the financing was reduced from \$1,700,000 to \$1,300,000 the Internal Rate of Return (IRR) would go {#3}

If the sale price at the end of year 5 changed from \$2,860,650 to \$3,100,000 the Net Present Value (NPV) would go {#4}

If the short term reinvestment rate of 2.50% was changed to 0.5% the Modified Internal Rate of Return would go {#5}

How much would the price have to drop to achieve an Internal Rate of Return (IRR) of 13.00%? \${#6}

### Analysis Q15

An investor has \$400,000 to invest and has two options:

1. Buy one home for cash of \$400,000 and rent the home
2. Buy 4 homes using a 75% LTV for a total purchase price of \$1,600,000

If the properties increase in value by 10% calculate the profit

Investment 1 \${#1}
Investment 2 \${#2}

### Analysis Q3

If the lender is using a Debt Service or Coverage Ratio of 1.22 in what year could the building be refinanced and the mortgage increased? The mortgage can be increased in year {#1}

### Analysis Q7

In carrying out discounted cash flow analysis and calculating the Internal Rate of Return (IRR) and the Net Present Value a timing convention is used.

Select the appropriate timing convention for each of the following cash flows. (One mark each)

Correct answer is identified by “B” for Beginning of year and “E” for End of Year

Purchase price or initial investment {#1}

Future capital expenditures such as replacing the roof in Year 4 {#2}

Creation of a mortgage {#3}

Repayment of a mortgage {#4}

Payments of Principal and Interest {#5}

Revenues {#6}

Expenses {#7}

Sale of the building at the end of the “Analysis Period” {#8}

### Analysis Q8

In carrying out discounted cash flow analysis and calculating the Internal Rate of Return (IRR) and the Net Present Value (NPV) a “Sign Convention” is used.

Select the appropriate sign convention for each of the following cash flows. (One mark each)

Purchase price or initial investment {#1}

Future capital expenditures such as replacing the roof in Year 4 {#2}

Creation of a mortgage {#3}

Repayment of a mortgage {#4}

Payments of Principal and Interest {#5}

Revenues {#6}

Expenses {#7}

Sale of the building at the end of the “Analysis Period” {#8}

### Analysis Q9

Identify the fundamental difference between the Cap Rate and the Internal Rate of Return (IRR) (One mark each)

Only considers one year {#1}

Considers many years {#2}

Property is never sold {#3}

Property is sold at the end of the analysis period {#4}

Net Operating Income (NOI) is constant and goes on forever {#5}

Income and expenses change every year {#6}

Ignores future capital expenditures {#7}

Includes future capital expenditures {#8}

Excludes financing {#9}

Includes financing {#10}

Simple and quick rule of thumb {#11}

Comprehensive analysis {#12}

Ignores the “Time Value of Money” {#13}

Takes into account the ‘Time Value of Money” {#14}

### IRR NPV Intro Q15

If you received the following cash flow and calculated the Interest Rate, the answer is 9.70% If you calculated the Internal Rate of Return (IRR) the answer would be: {#1}%

### IRR NPV Intro Q4 From a financial perspective which investment:

Offers the highest return
{#1}

Which is the most risky investment?
{#2}

### IRR Q5

The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate.

### IRR Q6

If the purchase price is dropped by \$206,083 what is the Internal Rate of Return (IRR)? {#1}%

### IRR Q7 If the purchase price is reduced by \$430,000 the Internal Rate of Return (IRR) will change from 7.95% to {#1}%

### IRR Q8

The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate

### IRR Q9

The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate because of the impact of financial leverage.

### MIRR Q2

If the Internal Rate of Return (IRR) is 11.50% and the short term re-investment rate is 2.5% and the short term borrowing rate is 5.7% the Modified Internal Rate of Return (MIRR) will be {#1} than the Internal Rate of Return (IRR).

### MIRR Q4

In the following example the Modified Internal Rate of Return (MIRR) will be {#1} than the Internal Rate of Return (IRR). ### NPV Q2

If the Net Present Value (NPV) is positve the return on investment (IRR) is {#1} the Investor's desired return or discount rate.

### NPV Q3

If the Net Present Value (NPV) is negative the return on investment (IRR) is {#1} the Investor's desired return or discount rate.

### NPV Q6

How much does the purchase price have to be dropped in order to achieve a return (IRR) of 13.00% \${#1}

### NPV Q7

If the purchase price was dropped by \$206,083 what is the Net Present Value (NPV) at 12.00%? \${#1}

### Risk Q3

The higher the risk the {#1} the desired return.

### Analysis Q10

Replacing the roof for \$352,000 is referred to as a:

• Future capital expenditure
• Non recurring expense
• Operating expense

### Analysis Q11

When an investor states that they want a return of 9.00% they are referring to:

• Any one of these financial measures
• Internal Rate of Return (IRR)
• Return on Equity (Cash on Cash)
• Modified Internal Rate of Return (MIRR)
• Investment Yield
• Cap Rate

### Analysis Q16

Which property will most likely show the highest Internal Rate of Return (IRR)? • Investment A
• Investment B
• Investment C

### Analysis Q18

Prudent investment analysis involves balancing the investment return against the risk.

Select the investment that has the healthiest balance between the risk and the reward • Investment A
• Investment B
• Investment C

### Analysis Q2

Based on the financial information shown below how risky is this investment? • High risk
• Medium risk
• Low risk

### Analysis Q4

What's the impact of financial leverage for this investment? • Increases the Return on Investment (IRR)
• Decreases the Return on Investment (IRR)
• No change in the Return on Investment (IRR)

### Analysis Q5

Why is the Internal Rate of Return (IRR) higher with financing? • Because of the positive impact of financial leverage
• Because different purchase prices are used in calculating the Internal Rate of Return (IRR) with and without financing
• Because the investor's discount rate used for calculating the Net Present Value (NPV) of 13.00% was the same with or without financing

### Analysis Q6

Why is the Net Present Value (NPV) at 13% with financing of (\$180,036) less than the Net Present Value (NPV) without financing of (\$526,867)? • Because of the positive impact of financial leverage

• Because different discount rates were used in calculating the Net Present Value (NPV) with and without financing

• Because different purchase prices were used in calculating the Net Present Value (NPV) with and without financing

### Cap Rates Q1

If the Cap Rate is calculated using the "Sale Price" and next years "Net Operating Income (NOI)" which one of the following statements is most correct?

• The Cap Rate calculation is correct
• The calculation of the Cap Rate is incorrect because the future value of the property has not been included
• Using the Sale Price and the Net Operating Income (NOI) can result in an incorrect Cap Rate because of factors that you may not be aware of such as the the cost of urgent major repairs that have influenced the purchase price

### Cap Rates Q5

Which of the following statements are correct (1 mark each)

• The "True Cap Rate" is always equal to or less than the "Apparent Cap Rate" because the True Cap Rate takes into account urgent major repairs
• The "Apparent Cap Rate" takes into account the cost of major urgent repairs
• The "True Cap Rate" and the "Apparent Cap Rate" are always the same
• The "Apparent Cap Rate" ignores the impact of major repairs

### Finance Q3

In buying a property the buyer may have to take over a mortgage with an interest rate higher than the current interest rate because the mortgage can’t be paid off or the penalty for paying off the mortgage is very high. To facilitate the deal the buyer can:

• Calculate the additional costs of taking over the unfavorable mortgage and deduct the costs from the purchase price
• Assume the first mortgage but have the seller provide a second mortgage (if the first mortgage allows this) at a low interest rate that offsets the costs of assuming the first mortgage
• Deduct the interest cost penalty of paying off the first mortgage from the purchase price
• The buyer can use any one of these approaches

### Finance Q4

Which of the following financial measures can be used when carrying out investment analysis to determine the potential mortgage loan amount?

• Debt Service or Coverage Ratio
• Loan to Value Ratio (LTV)
• Default Ratio (Breakeven Point)
• Return on Equity (ROE) or Cash on Cash
• Internal Rate of Return (IRR)
• Operating Expense Ratio (OER)
• Net Present Value (NPV)

### IRR NPV Intro Q1

Which would you rather have?

• Receive \$750,000 in 5 years time

### IRR NPV Intro Q10

In calculating the Internal Rate of Return (IRR) for this investment the: • time value of money was taken into account

• the time value of money was ignored

• Can't tell

### IRR NPV Intro Q11

Which items are not included when calculating the yearly cash flows from an investment in an income property?

• Potential Gross Income
• Vacancy Loss
• Operating Expenses
• Principal Payments
• Interest Payments
• Future Sale Price
• Cap Rate
• A major capital expenditure in year 5
• Refinancing in year 4

### IRR NPV Intro Q12

Which of the following is not included when calculating the operating cash flow?

• Potential Gross Income
• Vacancy & credit loss
• Operating expenses
• Depreciation
• Principal and interest payments

### IRR NPV Intro Q13

Which of the following financial measures does not take into account the "Time Value of Money"? (1 mark each)

• Cap Rate
• Debt Service Ratio
• Return on Equity (Cash on Cash)
• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Modified Internal Rate of Return (MIRR)

### IRR NPV Intro Q14

If the Internal Rate of Return (IRR) is 9.75% which one of the following statements is correct?

• Positive cash flows are reinvested at 9.75% and operating losses are ignored
• Positive cash flows are re-invested at 9.75% and the interest rate of money borrowed to cover losses is at 9.75%
• When calculating the Internal Rate of Return positive cash flows are not re-invested because this would result in a high Internal Rate of Return (IRR)
• Positive cash flows are re-invested at 9.75% but the interest rate on losses is zero

### IRR NPV Intro Q16

To calculate the return on investment for an uneven cash flow such as the one below you: • Calculate the Interest Rate using any standard financial calculator
• Need to calculate the Internal Rate of Return (IRR)
• Treat as a standard mortgage and calculate the interest rate

### IRR NPV Intro Q2

Which of the following is true?

Discounted Cash flow analysis takes into account:

• Time value of money
• The impact of financing
• Is used to calculate the Internal Rate of Return
• The time period that the investment is held
• All of these statements are true

### IRR NPV Intro Q3

The diagram below shows the projected lease rates and renewals for two comparable properties. Which is the most valuable property? • Property A
• Property B

### IRR NPV Intro Q5

Which of these two properties would provide the highest Internal Rate of Return (IRR)? • Property A
• Property B

### IRR NPV Intro Q6

Which property would provide the highest Internal Rate of Return? • Property A
• Property B
• Very hard to tell without calculating the Internal Rate of Return (IRR)

### IRR NPV Intro Q7

The best way to decide which investment provides the highest return is to: • Use the Cap Rate approach
• Use discounted cash flow analysis and calculate the Internal Rate of Return (IRR) and Net Present Value (NPV)
• Calculate the average cash flow and divide by the investment to get the Return on Investment (ROI)

### IRR NPV Intro Q8

In carrying out long term real estate investment analysis the "Analysis Period" refers to:

• The time period in years used in carrying out discounted cash flow analysis
• Is always five years for rental apartment buildings and ten years for commercial properties
• the economic life of the property

### IRR NPV Intro Q9

Discounted cash flow analysis refers to:

• Developing cash flows and calculating the financial return by taking into account "Time Value of Money"
• Is the same approach as using a Cap Rate to determine the value of a property
• Calculating the financing returns using the average yearly cash flows to calculate the Return of Investment (ROI)

### IRR Q1

The reinvestment assumption used when calculating the Internal Rate of Return (IRR)

• Can cause the Internal Rate of Return (IRR) to be overstated
• Has no impact on the Internal Rate of Return (IRR)

### IRR Q10

For a typical Cap Rate around 7% to 8% the Internal Rate of Return (IRR) before tax is around:

• 12% to 14.5%
• 7% to 8%
• 5% to 6%
• 15% to 18%

### IRR Q12

Under what conditions does the Cap Rate come close to being equal to the Internal Rate of Return (IRR)? (One mark each)

• The Net Operating Income (NOI) is constant
• The Net Operating Income (NOI) is projected over many years such as 50 years
• The property is never sold
• There is no financing
• The property is sold at the end of the analysis period
• The Net Operating Income (NOI) goes up at a constant rate every year
• When the mortgage interest rate equals the Cap Rate

### IRR Q2

If the Internal Rate of Return (IRR) is 11.19% when calculating the Internal Rate of Return (IRR) losses are borrowed at:

• 11.19%
• The interest rate used for the first mortgage
• 0%
• 15%

### IRR Q3

If an Investor's desired return or discount rate is 14% and the Internal Rate of Return (IRR) is 12.75%. Positive cash flows when calculating the Internal Rate of Return (IRR) are reinvested at:

• 12.75%
• 14% the Investor's discount rate
• 0%

### MIRR Q1

The Modified Internal Rate of Return (MIRR):

• Uses the same reinvestment assumptions as the Internal Rate of Return (IRR)
• Uses a short term "Re-investment Rate" and a "short term borrowing rate"
• Uses only a "short term borrowing rate"
• None of these statements are correct

### NPV Q4

The Investor's discount rate is used to calculate the:

• Cap Rate
• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Cash on Cash or Return on Equity
• None of these

### NPV Q5

Which one of the following might be a good reference point in deciding on the "Discount Rate" or "Desired Return" when calculating the Net Present Value (NPV)?

• A conservative second morgage rate for the same kind of property
• The Cap Rate from comparable properties
• Government bond rate
• The average return for a large REIT (Real Estate Investment Trust)

### NVP Q1

Which statement is correct?

• If the Net Present Value (NPV) is positive the return is greater than the investment's discount rate or desired return
• If the Net Present Value (NPV) is negative the return is greater than the investor's discount rate or desired return

### PV Appraisal Q1

The following "Present Value Appraisal Report" shows how much of the Present Value (PV) is being generated by the "Net Operating Income" and how much by the Present Value of the Sale Reversion. Which statement is correct?

• The Present Value calculations are made using the financing but not the capital expenditures

• The Present Value calculations exclude capital expenditures and financing

• The Present Value calculations take into account capital expenditures and financing

### PV Appraisal Q2

Which one of the following statements is correct? • The analysis has relied too much on capital appreciation
• The analysis has relied too much on the income and expenses increasing over time
• The use of a high mortgage interest rate has resulted in the Present Value of the Reversion (Sale) being 64.97%, which is high

### Risk Q2

Which is the most risky investment from a financial perspective?

 Year Investment A Investment B 0 <1,000,000> <1,600,000> 1 600,000 200,000 2 500,000 300,000 3 400,000 400,000 4 300,000 500,000 5 200,000 600,000 Total 400,000 400,000

• Property A

• Property B

### Risk Q4

When carrying out investment analysis which are the best financial measures for assessing the potential investment risk? (1 mark each)

• Debt Service or Coverage Ratio
• Default Ratio (Breakeven Point)
• Return on Equity (ROE) or Cash on Cash
• Internal Rate of Return (IRR)
• Operating Expense Ratio (OER)
• Net Present Value (NPV)

### Risk Q5

Which investment would be considered the least risky? • Investment A
• Investment B
• Investment C

### Tax Q16

The “Undepreciated Balance” refers to:

• The value of the improvements on acquisition less the depreciation claimed to date
• The depreciation claimed to date
• The value of the improvements on acquisition plus the costs associated with the acquisition such as the legal fees

### Tax Q18

The term “Amortization” in connection with an asset refers to:

• Spreading an intangible asset such as a leasing fee over its useful life such as the first term of the lease

• Is a form of revenue from the investor’s perspective

• Is an operating expense

### Tax Q8

Which of the following can be claimed as an expense for tax purposes (One mark each)

• Maintenance
• Property management fee
• Accounting fees related to the property
• Mortgage interest expense
• Mortgage principal payments
• Large leasehold improvements
• Replacing the elevator for \$500,000

### Tax Q9

Which of the following are expensed through depreciation claims for tax purposes (One mark each)

• Maintenance
• Property management fee
• Accounting fees related to the property
• Mortgage principal payments
• Large leasehold improvements
• Replacing the roof for \$450,000
• Value of the improvements on acquisition
• Value of the land on acquisition

### Analysis Q13

The Return on Investment always refers to the Return on Equity (Cash on Cash)

• True
• False

### Analysis Q14

The Internal Rate of Return (IRR) is not the same as the Return on Equity (Cash on Cash)

• True
• False

### Analysis Q17

Sometimes the best strategy if you own a property is to refinance the first mortgage and take the funds from refinancing and invest in another property

• True
• False

### Cap Rates Q2

The "Apparent Cap Rate" ignores the hidden factors that have influenced the price such as the buyer discovering that \$350,000 has to be spent on replacing the roof and major repairs to the HVAC system.

• True
• False

### Cap Rates Q3

The Cap Rate approach is an excellent approach to valuing an income property with the following lease arrangement. • True
• False

### Finance Q1

There may be conditions in the mortgage contract that makes it difficult to sell the property

• True
• False

### Finance Q2

In order to put a deal together the seller can always provide a second mortgage to lower the equity required by the buyer

• True
• False

### Finance Q5

If you refinance a property and take money out of the property and invest in another property you will have to pay capital gains tax.

• True
• False

### IRR Q11

A Cap Rate can be directly compared with the Internal Rate of Return (IRR) because they both are a form of Return on Investment (ROE)

• True
• False

### IRR Q13

The Cap Rate is always higher than the Internal Rate of Return (IRR) because financing reduces the cash flow before tax, which in turn lowers the Internal Rate of Return (IRR)

• True
• False

### IRR Q14

The Internal Rate of Return (IRR) is always lower than the Cap Rate because the mortgage interest payment lowers the operating costs, which in turn reduces the Internal Rate of Return (IRR)

• True
• False

### IRR Q4

The Cap Rate and the Internal Rate of Return (IRR) are similar measures and therefore can be compared.

• True
• False

### MIRR Q3

The Modified Internal Rate of Return (MIRR) is more commonly used than the Internal Rate of Return (IRR).

• True
• False

### Tax Q1

Interest payments on a mortgage cannot be deducted for tax purposes because it is a financial cost not an operating expense

• True
• False

### Tax Q10

A full recapture of depreciation occurs when the value of the improvements on sale is greater than on acquisition

• True
• False

### Tax Q11

A partial recapture of depreciation occurs when the value of the improvements on sale is greater than on acquisition

• True
• False

### Tax Q12

A partial recapture of depreciation occurs when the value of the improvements on sale lies between the value of the improvements on acquisition and the undepreciated balance

• True
• False

### Tax Q13

Recaptured depreciation is taxed at the same rate as the capital gain

• True
• False

### Tax Q14

A capital gain is created when the value of the improvements on sale is greater than the undepreciated balance

• True
• False

### Tax Q15

A capital gain for real estate is taxed at the same rate as income tax

• True
• False

### Tax Q17

Land is a depreciable asset.

• True
• False

### Tax Q19

If the value of the improvements on sale is less than the undepreciated balance there will be no recaptured depreciation tax to be paid when the building is sold.

• True
• False

### Tax Q2

When a building is sold the seller may have to pay recaptured depreciation because they claimed too much depreciation during the ownership period.

• True
• False

### Tax Q20

Is the following statement correct?

Properties that are hard to sell because of tax implications have the following characteristics:

1. Owned for a long period of time
2. Gone up a lot in value
3. Heavily depreciated
4. Large mortgage registered on the property

• True
• False

### Tax Q21

There is a possibility that the investor doesn’t receive any funds from the sale of the property after paying off the mortgage, capital gain tax and the recaptured depreciation tax. Instead they could end up owing money.

• True
• False

### Tax Q22

When an investor sells a property that they have owned for a long time they will always receive funds from the sale because the property has increased in value

• True
• False

### Tax Q3

Recaptured Depreciation Tax occurs when the value of the improvements on sale is greater than the undepreciated value

• True
• False

### Tax Q4

Recaptured Depreciation Tax occurs when the value of the improvement on sale is more than the undepreciated value

• True
• False

### Tax Q5

Recaptured Depreciation Tax occurs when the value of the improvements on sale is more than the undepreciated value

• True
• False

### Tax Q6

Recaptured Depreciation Tax occurs when the value of the improvements on sale equals the undepreciated value

• True
• False

### Tax Q7

Recaptured Depreciation Tax occurs when the value of the land on sale is less than the value of the land on acquisition

• True
• False