CPM Asset Management and Investment Analysis 1 — Questions and Answers
Question 1: Which metric represents the ratio of a property's net operating income to its total value or purchase price?
- Cash-on-cash return
- Capitalization rate (Correct answer)
- Internal rate of return
- Gross rent multiplier
Correct answer: Capitalization rate
The capitalization rate (cap rate) is calculated by dividing the net operating income (NOI) by the property's current market value or purchase price.
Question 2: Net Operating Income (NOI) is calculated by subtracting which of the following from effective gross income?
- Mortgage payments and depreciation
- Operating expenses excluding debt service (Correct answer)
- Capital expenditures and reserves
- Vacancy losses and credit losses
Correct answer: Operating expenses excluding debt service
NOI is calculated by subtracting all operating expenses (excluding debt service and capital expenditures) from effective gross income.
Question 3: A property generates a potential gross income of $500,000 with a 5% vacancy rate. What is the effective gross income?
- $450,000
- $475,000 (Correct answer)
- $495,000
- $525,000
Correct answer: $475,000
$500,000 × (1 - 0.05) = $475,000 effective gross income after accounting for the 5% vacancy factor.
Question 4: Which approach to real estate valuation estimates value based on the income a property is expected to produce?
- Sales comparison approach
- Cost approach
- Income capitalization approach (Correct answer)
- Replacement value approach
Correct answer: Income capitalization approach
The income capitalization approach values a property based on its expected income stream, making it the primary method used for income-producing properties.
Question 5: What does a Debt Service Coverage Ratio (DSCR) of 1.25 indicate?
- The property generates 25% less income than needed to cover debt payments
- The property's NOI is 25% more than the annual debt service (Correct answer)
- The loan-to-value ratio is 125%
- Operating expenses exceed income by 25%
Correct answer: The property's NOI is 25% more than the annual debt service
A DSCR of 1.25 means the property's NOI is 1.25 times the annual debt service, providing a 25% cushion above the required loan payments.
Question 6: Which investment analysis tool accounts for the time value of money when evaluating a real estate investment?
- Gross rent multiplier
- Capitalization rate
- Discounted cash flow analysis (Correct answer)
- Operating expense ratio
Correct answer: Discounted cash flow analysis
Discounted cash flow (DCF) analysis accounts for the time value of money by discounting future cash flows back to their present value using a required rate of return.
Question 7: In property asset management, what is the primary purpose of a capital reserve study?
- To determine current rental market rates
- To project future major repair and replacement costs (Correct answer)
- To calculate annual depreciation for tax purposes
- To set the property's asking price for sale
Correct answer: To project future major repair and replacement costs
A capital reserve study projects the timing and cost of future major repairs and replacements, enabling property owners to fund reserves adequately over time.
CPM Asset Management and Investment Analysis 1
Which metric represents the ratio of a property's net operating income to its total value or purchase price?