CMPS Real Estate Investment Planning 4 — Questions and Answers
Question 1: A value-add real estate strategy typically involves:
- Acquiring underperforming properties and increasing NOI through improvements or better management (Correct answer)
- Buying stabilized trophy assets in primary markets
- Purchasing properties with NNN leases to ensure passive income
- Investing in REITs for diversified exposure
Correct answer: Acquiring underperforming properties and increasing NOI through improvements or better management
Value-add investing targets properties with below-market performance where operational improvements or renovations can increase NOI and value.
Question 2: Under IRS passive activity rules, rental real estate losses can offset ordinary income up to $25,000 per year only if the taxpayer:
- Actively participates and has MAGI below $100,000 (Correct answer)
- Materially participates and has no other passive income
- Is a licensed real estate professional
- Holds the property in an LLC taxed as a partnership
Correct answer: Actively participates and has MAGI below $100,000
The $25,000 rental loss allowance phases out between $100,000 and $150,000 MAGI and requires active participation.
Question 3: A property is purchased for $400,000 and sold 5 years later for $520,000. Ignoring depreciation recapture, the long-term capital gain is:
- $120,000 (Correct answer)
- $80,000
- $400,000
- $520,000
Correct answer: $120,000
Long-term capital gain = Sale Price − Purchase Price = $520,000 − $400,000 = $120,000.
Question 4: Which type of NNN lease structure makes the tenant responsible for property taxes, insurance, AND maintenance expenses?
- Triple net (NNN) lease (Correct answer)
- Gross lease
- Modified gross lease
- Double net (NN) lease
Correct answer: Triple net (NNN) lease
A triple net lease passes all three expense categories—taxes, insurance, and maintenance—to the tenant, reducing landlord operating risk.
Question 5: An investor financing a multi-family property wants to minimize the impact of rising interest rates on long-term cash flow. The best strategy is to:
- Lock in a long-term fixed-rate mortgage at current rates (Correct answer)
- Use a floating-rate bridge loan
- Maximize leverage with an interest-only ARM
- Refinance annually to capture lower short-term rates
Correct answer: Lock in a long-term fixed-rate mortgage at current rates
A long-term fixed-rate mortgage eliminates interest rate risk by locking in the payment for the life of the loan.
Question 6: Which property type is generally considered most resilient during economic downturns due to consistent consumer demand?
- Grocery-anchored retail strip centers (Correct answer)
- Luxury office towers
- Regional malls
- Hotel properties
Correct answer: Grocery-anchored retail strip centers
Grocery-anchored retail benefits from necessity-driven consumer traffic that remains relatively stable even during recessions.
Question 7: Which term describes the additional yield an investor requires above the risk-free rate to compensate for real estate investment risk?
- Risk premium (Correct answer)
- Cap rate spread
- Equity dividend rate
- Yield to maturity
Correct answer: Risk premium
A risk premium is the excess return demanded by investors for taking on the additional uncertainty of real estate versus risk-free Treasuries.
CMPS Real Estate Investment Planning 4
A value-add real estate strategy typically involves: