Real Estate Investing Practice Test — Questions and Answers
Question 1: True/False: Amenity - a feature of a property that increases its value to potential buyers or tenants; amenities include location, construction style, floor space, and the number of bedrooms or bathrooms; amenities typically appear in the kitchen, master bedroom, dining room, and bathrooms; kitchen appliances are an effective selling device; homeowners who invest in these four rooms enjoy the highest return on their investments when selling a home; amenities such as specialized rooms include an entertaiment center; amenities such as specialized rooms include an entertainment center; amenities such as specialized rooms
- A) False (Correct answer)
- B) True
Correct answer: A) False
The provided definition for 'Amenity' is overly verbose and contains extraneous or incorrect details. While amenities do increase property value, the definition's specific claims about where amenities typically appear or which rooms yield the highest return are not part of a concise, accurate definition of the term itself.
Question 2: True/False: Abstract Of Title - The number of usable square feet (common area) in a commercial property divided by the number of rentable square feet (private area); always less than one because some square footage in a building will not be rentable; important for lease rates in commercial real estate where lease costs are calculated based on the rentable area with an add-on factor for the use of common spaces;
- A) False (Correct answer)
- B) True
Correct answer: A) False
This definition describes an 'Add-On Factor' or 'Load Factor,' which is a ratio used in commercial real estate to account for common areas. An 'Abstract of Title,' however, is a historical summary of all recorded legal documents affecting a property's title, including deeds, mortgages, and liens, used to verify ownership and identify encumbrances.
Question 3: True/False: Alligator Property - When a buyer purchases a real estate property during or near the peak of a real estate market cycle, the cost of mortgage payments, property taxes, insurance, and maintenance is greater than the income it brings in; eats up all of the owner's profit, leaving the owner with negative cash flow; when a buyer purchases a real estate property during or near the peak of a real estate market cycle; avoid by buying a property with a large down payment or making capital improvements; when a buyer purchases a real estate property
- A) False
- B) True (Correct answer)
Correct answer: B) True
The definition accurately describes an 'Alligator Property' as a real estate investment where the ongoing costs (mortgage, taxes, insurance, maintenance) exceed the income generated by the property. This negative cash flow 'eats up' the owner's profits, often occurring when a property is purchased at the peak of a market cycle.
Question 4: True/False: Appraiser - a person, organization, or other entity that assigns rights it owns to another. The assignor gives the assignment to the assignee.
- A) False (Correct answer)
- B) True
Correct answer: A) False
The provided definition describes an 'Assignor,' which is a party that transfers its rights to another. An 'Appraiser,' in contrast, is a professional who provides an expert, unbiased estimate of a property's fair market value, based on specific methodologies and market analysis.
Question 5: Asset protection trusts, accounts-receivable financing, and family limited partnerships are examples of financial planning intended to protect one's assets from creditor claims; insulate assets in a legal manner without engaging in illegal practices such as concealment, contempt, fraudulent transfer, tax evasion, or bankruptcy fraud; effective asset protection begins before a claim or liability occurs.
- Amenity
- Asset Protection (Correct answer)
- Real Property
- Appraisal Management Company (AMC)
Correct answer: Asset Protection
The definition accurately describes 'Asset Protection' as a set of legal financial planning strategies aimed at shielding one's assets from potential creditor claims. These strategies, such as trusts and family limited partnerships, are designed to legally insulate assets proactively, before any claims or liabilities arise, without engaging in illegal practices.
Question 6: When a renter leases an apartment only to have the owner shift during the lease, the act of assigning power or jurisdiction to a party even while no legal rights exist; to acknowledge the relationship between the parties in a transaction
- Appraised Value
- Add-On Factor
- Attornment (Correct answer)
- Loss Factor
Correct answer: Attornment
The definition correctly describes 'Attornment' as the act by which a tenant acknowledges a new landlord or owner of a property. This typically occurs when a rental property is sold, and the existing lease agreement is transferred to the new owner, requiring the tenant to recognize the new party as their landlord.
Question 7: Individual appraisers who work for AMCs provide the actual property valuation services; independent entity mortgage lenders use to order residential real estate valuation services for properties on which they are considering extending loans to homebuyers; AMCs select appraisers and deliver appraisal reports to lenders; individual appraisers who work for AMCs provide actual property valuation services.
- Appraisal Management Company (AMC) (Correct answer)
- Real Estate Investment Trust - REIT
- Accelerated Amortization
- Bank-Owned Property
Correct answer: Appraisal Management Company (AMC)
The definition accurately describes an 'Appraisal Management Company (AMC)' as an independent third-party entity utilized by mortgage lenders. AMCs are responsible for ordering, selecting, and managing individual appraisers to provide valuation services for properties, ensuring impartiality and compliance in the appraisal process.
Question 8: Commercial appraisers focus on the market for office buildings, hotels, retail locations, and other properties that include an income generating quality; residential appraisers focus on properties where individuals and households are domiciled; appraisers act independently of the buying and selling parties in a transaction to arrive at the fair value of an asset without bias; appraisers act independently of the buying and selling parties in a transaction to arrive at the fair value of an asset without bias; appraisers act independently of the buying and selling parties in a transaction to
- Resolution Trust Corporation - RTC
- Adverse Possession
- Appraiser (Correct answer)
- Appraised Value
Correct answer: Appraiser
The definition accurately describes an 'Appraiser' as a professional who independently assesses and determines the fair value of real estate assets. It correctly differentiates between residential and commercial appraisers and emphasizes their unbiased role in a transaction.
Question 9: The sale price of a multi-family residential housing unit sold through the FDIC's Affordable Housing Program; the highest bidder was not always the buyer.
- Affordable Market Value (Correct answer)
- Adverse Possession
- Appraisal Management Company (AMC)
- Abstract Of Title
Correct answer: Affordable Market Value
The definition accurately describes 'Affordable Market Value' in the specific context of the FDIC's Affordable Housing Program. This program aimed to sell multi-family residential units at prices that were not necessarily the highest bid, but rather at a value that made them affordable, aligning with the program's social objectives.
Question 10: Due to unresolved legal or financial issues, a title that does not provide ownership to its holder can hinder the titleholder from selling the asset or legally transferring it; a lien on the property, overdue taxes, or failure to address a building violation.
- Bad Title (Correct answer)
- Absentee Owner
- Abstract Of Title
- Boom
Correct answer: Bad Title
The definition accurately describes a 'Bad Title' as a property title that is encumbered by unresolved legal or financial issues. These issues, such as liens, overdue taxes, or building violations, prevent the clear transfer of ownership and can hinder the titleholder from legally selling or transferring the asset.
Question 11: An individual or business who owns a property but does not live in it or manage it; distinguishes those who are hands-on from those who hire property managers; tends to be commercial; incentivized by capital appreciation
- Absentee Owner (Correct answer)
- Bank-Owned Property
- Boom
- Abstract Of Title
Correct answer: Absentee Owner
The definition accurately describes an 'Absentee Owner' as an individual or business that owns a property but does not reside in or directly manage it. These owners often hire property managers and are typically motivated by capital appreciation rather than direct occupancy or day-to-day operations.
Question 12: Start with the original grant deed and include all subsequent changes of ownership as well as any extra claims, such as easements, encroachments, encumbrances, liens, litigations, restrictions, and tax sales; highly expensive to replace.
- Absentee Owner
- Bad Title
- Abstract Of Title (Correct answer)
- Absentee Owner
Correct answer: Abstract Of Title
The description accurately defines an Abstract of Title, which is a comprehensive historical record of a property's ownership and any associated claims or encumbrances. It meticulously traces the property's history from the original grant deed through all subsequent changes, including easements, liens, and restrictions. This detailed document is crucial for understanding the legal status and marketability of a property.
Question 13: A professional appraisal of a property's value at a specific point in time; accomplished during the mortgage origination process by a professional appraiser; normally chosen by the lender but paid for by the borrower.
- Appraised Value (Correct answer)
- Loss Factor
- Accelerated Amortization
- Accessory Dwelling Unit
Correct answer: Appraised Value
The description precisely matches the definition of Appraised Value, which is a professional and impartial estimate of a property's market worth at a specific point in time. This valuation is typically performed by a qualified appraiser during the mortgage origination process to ensure the property adequately secures the loan. Although the lender usually selects the appraiser, the borrower is responsible for the appraisal fee.
Question 14: After a foreclosure sale, homes are taken into a bank's inventory; acquired by a financial institution when a homeowner fails to make their mortgage payments; properties are then sold at a discount, far lower than current housing prices.
- Absentee Owner
- Bank-Owned Property (Correct answer)
- Bad Title
- Absentee Owner
Correct answer: Bank-Owned Property
The description accurately defines Bank-Owned Property, also known as Real Estate Owned (REO). These properties are acquired by financial institutions after a foreclosure sale when a homeowner fails to meet their mortgage obligations. Banks then add these homes to their inventory and typically sell them at a discount compared to current market prices to recover their investment.
Question 15: Non-use square footage divided by rentable square footage; includes structural components such as inner walls, support poles, and maintenance rooms that renters cannot use; frequently categorized as add-on factor, despite the fact that it is not usable, making it more expensive.
- Appraised Value
- Loss Factor (Correct answer)
- Accelerated Amortization
- Accessory Dwelling Unit
Correct answer: Loss Factor
The description directly corresponds to the definition of Loss Factor in commercial real estate. This metric calculates the ratio of non-usable square footage (such as structural elements, support columns, and utility rooms) to the total rentable square footage. The loss factor effectively increases the cost per usable square foot for tenants, as they pay for space they cannot fully occupy or utilize.
Question 16: A secondary house or apartment that shares a building lot with a larger, primary house; also known as an in-law or mother-in-law unit, secondary dwelling unit, granny flat, or carriage house; has its own kitchen, living area, and separate entrance; may be attached to a house or garage, or it can be built as a stand-alone unit, but it will generally use the primary house's water and energy connections.
- Accelerated Amortization
- Accessory Dwelling Unit (Correct answer)
- Appraised Value
- Absentee Landlord
Correct answer: Accessory Dwelling Unit
The description perfectly outlines an Accessory Dwelling Unit (ADU), detailing it as a secondary, independent living space located on the same property as a larger, primary house. ADUs are characterized by having their own kitchen, living area, and separate entrance, and can be attached or detached. They are also commonly known by terms like 'granny flat' or 'in-law unit'.
Question 17: Extra payments made to a mortgage principal; pay off a mortgage before the loan settlement date; lower overall interest payments; makes sense for variable rate loans; doesn't make sense in the United States on the first $750,000 of mortgage loan debt due to mortgage interest deduction; save for retirement or college first, then pay off mortgage
- Accelerated Amortization (Correct answer)
- Accessory Dwelling Unit
- Loss Factor
- Appraised Value
Correct answer: Accelerated Amortization
The description accurately defines Accelerated Amortization as the practice of making extra payments toward a mortgage principal. This strategy allows borrowers to pay off their mortgage before the scheduled loan settlement date, significantly reducing the total interest paid over the life of the loan. While beneficial for interest savings, its overall financial prudence depends on individual circumstances like interest rates and alternative investment opportunities.
Question 18: A person, corporation, or government organization that owns and leases out real estate but is not located on or near the property; simply for financial gain, may not undertake required property upkeep and maintenance; more frequent in commercial than residential.
- Absentee Owner
- Bank-Owned Property
- Accessory Dwelling Unit
- Absentee Landlord (Correct answer)
Correct answer: Absentee Landlord
The description precisely defines an Absentee Landlord as an individual, corporation, or government entity that owns and leases out real estate but does not reside on or near the property. These landlords often prioritize financial gain and may not be as diligent with property upkeep and maintenance due to their remote location. This arrangement is more common in commercial real estate than residential.
Question 19: True/False: Yield - In commercial real estate, yield refers to the annual cash return on investment, represented as a percentage of the investment's initial cost, or, less commonly, its projected current worth.
- A) False
- B) True (Correct answer)
Correct answer: B) True
The statement accurately defines 'Yield' in the context of commercial real estate. It refers to the annual cash return generated from an investment, expressed as a percentage of the initial investment cost or its current market value. This metric is fundamental for investors to assess the profitability and performance of their real estate assets.
Question 20: The Net Asset Worth (NAV) per share is the anticipated value of a single share based on a number of factors, including future changes in the underlying value of the company's real estate assets. NAV is typically modified quarterly or semi-annually after an initial ramp-up phase for each offering. While NAV can be used to calculate a share's Redemption Price, it is merely an estimate of worth, and the real market price that someone would pay for that share could vary significantly.
- Net Asset Value (NAV) (Correct answer)
- Free Cash Flow (FCF)
- Intrastate Crowdfunding
- Loan-to-Cost Ratio (LTC)
Correct answer: Net Asset Value (NAV)
The description accurately defines Net Asset Value (NAV) per share as the anticipated value of a single share, derived from various factors including future changes in the underlying real estate assets of a company. While NAV is a crucial estimate used for calculations like redemption price, the passage correctly notes that it is merely an estimate and the actual market price could differ significantly.
Real Estate Investing Practice Test
True/False: Amenity - a feature of a property that increases its value to potential buyers or tenants; amenities include location, construction style, floor space, and the number of bedrooms or bathrooms; amenities typically appear in the kitchen, master bedroom, dining room, and bathrooms; kitchen appliances
are an effective selling device; homeowners who invest in these four rooms enjoy the highest return on their investments when selling a home; amenities such as specialized rooms include an entertaiment center; amenities such as specialized rooms include an entertainment center; amenities such as specialized rooms