CMPS Investor Return on Investment 2 — Questions and Answers
Question 1: An investor purchases a rental property for $300,000 with $60,000 down. Annual NOI is $24,000. What is the cash-on-cash return?
- 8% (Correct answer)
- 40%
- 6%
- 12%
Correct answer: 8%
Cash-on-cash return = annual pre-tax cash flow / total cash invested; $24,000 / $300,000 is not correct — the cash flow must be calculated after debt service, but if NOI equals cash flow here: $24,000 / $60,000 = 40% is the raw ratio; however standard CoC uses actual cash invested ($60,000) vs. after-debt cash flow, so more context is needed, but given NOI as cash flow: $24,000 / $60,000 = 40%.
Question 2: Which metric best measures a property's profitability independent of financing?
- Cash-on-cash return
- Capitalization rate (Correct answer)
- Debt service coverage ratio
- Loan-to-value ratio
Correct answer: Capitalization rate
The capitalization rate (NOI / property value) evaluates a property's income potential without regard to how it is financed.
Question 3: A property's NOI increases from $20,000 to $22,000 while the cap rate remains at 8%. What happens to the property value?
- Decreases by $25,000
- Stays the same
- Increases by $25,000 (Correct answer)
- Increases by $2,000
Correct answer: Increases by $25,000
Value = NOI / cap rate; new value = $22,000 / 0.08 = $275,000 vs. old $250,000, an increase of $25,000.
Question 4: What does a Debt Service Coverage Ratio (DSCR) of 1.0 indicate?
- The property generates twice the income needed to cover debt
- NOI exactly covers annual debt service with no surplus (Correct answer)
- The loan is fully amortized
- LTV equals 100%
Correct answer: NOI exactly covers annual debt service with no surplus
A DSCR of 1.0 means NOI equals annual debt service exactly, leaving no cash flow cushion for the investor.
Question 5: An investor's equity grows from $80,000 to $112,000 over three years. What is the approximate annualized return on equity?
- 13.3%
- 40%
- 11.9% (Correct answer)
- 8%
Correct answer: 11.9%
Annualized return = (112,000/80,000)^(1/3) - 1 = 1.40^0.333 - 1 ≈ 11.87%, approximately 11.9%.
Question 6: Which of the following would DECREASE an investor's total return on a rental property?
- Rising market rents
- Higher property appreciation
- Increased vacancy rates (Correct answer)
- Lower interest rates on refinancing
Correct answer: Increased vacancy rates
Higher vacancy reduces collected rent, lowering NOI and therefore both cash flow and total return.
Question 7: A mortgage planner recommends a 15-year loan over a 30-year loan to an investor. The primary ROI benefit is:
- Lower monthly payments freeing up cash flow
- Faster equity buildup reducing interest cost over time (Correct answer)
- Higher initial LTV
- Increased tax deductions from more interest paid
Correct answer: Faster equity buildup reducing interest cost over time
A 15-year loan accelerates principal paydown and significantly reduces total interest paid, increasing net ROI over the hold period.
CMPS Investor Return on Investment 2
An investor purchases a rental property for $300,000 with $60,000 down.
Annual NOI is $24,000.
What is the cash-on-cash return?