Question 1

What does the Capitalization Rate (Cap Rate) measure, and how is it calculated?

Accepted 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?

Accepted 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?

Accepted 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?

Accepted 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?

Accepted 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.

Investment Analysis – Real Estate Broker Exam

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