Real Estate Investment Analysis – Broker Exam Flashcards
Master the 25 most tested investment analysis concepts for the Real Estate Broker Exam. Covers key financial ratios, valuation methods, cash flow analysis, and investment decision tools that appear most frequently on state and national broker licensing exams.
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Preview Questions
Question 1
What does the Capitalization Rate (Cap Rate) measure, and how is it calculated?
Answer
The Cap Rate measures the rate of return on an income-producing property based on its NOI. It is calculated as Net Operating Income (NOI) ÷ Property Value (or Purchase Price).
Question 2
A property generates an NOI of $45,000 and is listed for $500,000. What is the Cap Rate?
Answer
The Cap Rate is 9% ($45,000 ÷ $500,000 = 0.09).
Question 3
What is the Debt Coverage Ratio (DCR) and what minimum value do lenders typically require?
Answer
The DCR (or DSCR) equals NOI ÷ Annual Debt Service and measures a property's ability to cover its mortgage payments. Most lenders require a minimum DCR of 1.20 to 1.25.
Question 4
How is the Gross Rent Multiplier (GRM) calculated, and what is its primary limitation?
Answer
GRM = Purchase Price ÷ Gross Annual Rental Income. Its primary limitation is that it does not account for vacancies, operating expenses, or financing costs.
Question 5
What does the Loan-to-Value (LTV) ratio measure, and how is it calculated?
Answer
LTV measures the proportion of a property's value that is financed by debt. It is calculated as Loan Amount ÷ Appraised Value (or Purchase Price), expressed as a percentage.
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