CMPS - Certified Mortgage Planning Specialist Real Estate Investment Planning Questions and Answers — Questions and Answers
Question 1: A client is selling an investment property and wants to defer capital gains taxes. They plan to use the proceeds to purchase a new investment property. To comply with IRC Section 1031, what is the maximum number of days the client has from the closing of the relinquished property to close on the acquisition of the replacement property?
- 45 days
- 90 days
- 180 days (Correct answer)
- 365 days
Correct answer: 180 days
To qualify for a tax-deferred exchange under IRC Section 1031, the investor must close on the new replacement property within 180 days of closing the sale of the original (relinquished) property. There is also a shorter 45-day deadline to formally identify potential replacement properties.
Question 2: A real estate investor is analyzing a property with a Net Operating Income (NOI) of $80,000 and a current market value of $1,000,000. What is the capitalization rate (cap rate) for this property?
- 6%
- 8% (Correct answer)
- 10%
- 12.5%
Correct answer: 8%
The capitalization rate is calculated by dividing the Net Operating Income (NOI) by the property's current market value. In this case, $80,000 (NOI) / $1,000,000 (Market Value) = 0.08, or 8%.
Question 3: Which of the following best describes a primary advantage for a borrower who obtains a non-recourse loan for an investment property?
- They typically come with lower interest rates and fees.
- The lender can only seize the specific property as collateral in case of default. (Correct answer)
- They are easier to qualify for with less stringent underwriting.
- The loan-to-value (LTV) ratios are generally higher than recourse loans.
Correct answer: The lender can only seize the specific property as collateral in case of default.
With a non-recourse loan, the lender's only remedy in the event of a default is to seize the collateral (the property itself). The lender cannot pursue the borrower's other personal assets. Recourse loans, in contrast, allow the lender to go after other assets if the collateral is insufficient to cover the debt.
Question 4: A CMPS is advising a client on purchasing a small apartment building. The property has a potential gross income of $120,000. A vacancy and collection loss of 7% is anticipated. Total operating expenses, excluding mortgage payments, are $44,000. What is the property's Net Operating Income (NOI)?
- $76,000
- $67,600 (Correct answer)
- $111,600
- $71,880
Correct answer: $67,600
To calculate NOI, first determine the Effective Gross Income (EGI) by subtracting vacancy losses from the Potential Gross Income ($120,000 * 7% = $8,400; $120,000 - $8,400 = $111,600 EGI). Then, subtract the total operating expenses from the EGI ($111,600 - $44,000 = $67,600 NOI). Mortgage payments (debt service) are not included in the NOI calculation.
Question 5: When structuring a 1031 tax-deferred exchange, the 'like-kind' requirement means that the replacement property must be which of the following?
- The same type of property (e.g., an apartment building for an apartment building).
- Of equal or greater physical size and number of units.
- Located in the same state as the relinquished property.
- Held for investment or for productive use in a trade or business. (Correct answer)
Correct answer: Held for investment or for productive use in a trade or business.
The term 'like-kind' in a 1031 exchange is broad and refers to the nature or character of the property, not its grade or quality. Both the relinquished and replacement properties must be held for investment or business purposes. For example, an investor can exchange raw land for an office building.
Question 6: A client is considering two investment properties. Property A has a high capitalization rate, while Property B has a low capitalization rate. From a risk and return perspective, which of the following is most likely true?
- Property A is likely perceived as having higher risk and higher potential return. (Correct answer)
- Property B is likely perceived as having higher risk and lower potential return.
- Property A is likely a more stable, mature investment.
- Both properties offer identical risk-adjusted returns.
Correct answer: Property A is likely perceived as having higher risk and higher potential return.
Generally, a higher capitalization rate implies a higher potential return but also suggests greater perceived risk by the market. A lower cap rate usually indicates a lower-risk property with more stable income, often reflected in a higher purchase price relative to its income.
CMPS - Certified Mortgage Planning Specialist Real Estate Investment Planning Questions and Answers
A client is selling an investment property and wants to defer capital gains taxes.
They plan to use the proceeds to purchase a new investment property.
To comply with IRC Section 1031, what is the maximum number of days the client has from the closing of the relinquished property to close on the acquisition of the replacement property?