CPM Financial Management 1 — Questions and Answers
Question 1: What is 'Net Operating Income' (NOI) in real estate?
- Gross potential rent minus vacancy
- Effective gross income minus operating expenses before debt service (Correct answer)
- Net income after mortgage payments
- Total revenue minus depreciation
Correct answer: Effective gross income minus operating expenses before debt service
NOI equals effective gross income minus all operating expenses, but excludes debt service (mortgage payments) and capital expenditures.
Question 2: Which of the following is NOT typically included in operating expenses for a property?
- Property insurance
- Property taxes
- Mortgage principal payments (Correct answer)
- Property management fees
Correct answer: Mortgage principal payments
Mortgage principal payments are a financing expense (debt service), not an operating expense, and are excluded from the NOI calculation.
Question 3: What is a 'capital expenditure' (CapEx) in property management?
- Monthly utility payments
- Recurring maintenance costs
- Major improvements or replacements that extend the asset's useful life (Correct answer)
- Annual property tax payments
Correct answer: Major improvements or replacements that extend the asset's useful life
Capital expenditures are major investments—like roof replacement or HVAC installation—that improve or extend the life of the property beyond one year.
Question 4: Which ratio measures a property's ability to cover its debt payments from NOI?
- Cap rate
- Debt coverage ratio (DCR) (Correct answer)
- Gross rent multiplier
- Cash-on-cash return
Correct answer: Debt coverage ratio (DCR)
The debt coverage ratio (DCR) equals NOI divided by annual debt service; lenders typically require a DCR of at least 1.25.
Question 5: Effective Gross Income (EGI) is calculated as:
- Gross potential income minus vacancy and credit losses plus miscellaneous income (Correct answer)
- Net operating income plus operating expenses
- Gross potential income plus capital expenditures
- Base rent times number of units
Correct answer: Gross potential income minus vacancy and credit losses plus miscellaneous income
EGI = Gross Potential Income − Vacancy & Credit Losses + Other Income (laundry, parking, fees).
Question 6: What is a 'cash-on-cash return'?
- The ratio of NOI to property value
- Annual pre-tax cash flow divided by total equity invested (Correct answer)
- The internal rate of return over the hold period
- Gross rent divided by purchase price
Correct answer: Annual pre-tax cash flow divided by total equity invested
Cash-on-cash return measures annual pre-tax cash flow (after debt service) divided by the total cash equity invested.
CPM Financial Management 1
What is 'Net Operating Income' (NOI) in real estate?