Real Estate Investing Property Analysis 1 — Questions and Answers
Question 1: The Gross Rent Multiplier (GRM) is calculated by:
- Dividing annual gross rent by the property's purchase price
- Dividing the property's purchase price by annual gross rent (Correct answer)
- Dividing NOI by the property's purchase price
- Dividing annual gross rent by operating expenses
Correct answer: Dividing the property's purchase price by annual gross rent
GRM = Purchase Price ÷ Annual Gross Rent. It gives a quick ratio showing how many years of gross rent it would take to pay for the property — lower GRM generally indicates a better deal.
Question 2: The Debt Service Coverage Ratio (DSCR) is calculated by:
- Dividing total debt by property value
- Dividing annual mortgage payments by NOI
- Dividing NOI by annual debt service (mortgage payments) (Correct answer)
- Dividing gross rent by total expenses
Correct answer: Dividing NOI by annual debt service (mortgage payments)
DSCR = NOI ÷ Annual Debt Service. A DSCR above 1.0 means the property generates enough income to cover its debt payments; lenders typically require a minimum of 1.25.
Question 3: A property's operating expense ratio (OER) is best described as:
- Total expenses divided by gross potential income (Correct answer)
- NOI divided by total operating expenses
- Purchase price divided by annual expenses
- Net income divided by equity invested
Correct answer: Total expenses divided by gross potential income
OER = Total Operating Expenses ÷ Gross Potential Income. It measures what percentage of income is consumed by expenses; a lower OER indicates more efficient operation.
Question 4: The break-even occupancy rate tells an investor:
- The vacancy rate at which the property achieves maximum profit
- The minimum occupancy needed to cover all operating expenses and debt service (Correct answer)
- The occupancy rate required to achieve a 10% cash-on-cash return
- The average occupancy rate for comparable properties in the market
Correct answer: The minimum occupancy needed to cover all operating expenses and debt service
Break-even occupancy = (Operating Expenses + Debt Service) ÷ Gross Potential Rent. It identifies the minimum occupancy percentage at which the property neither profits nor loses money.
Question 5: When calculating After-Repair Value (ARV), an investor primarily relies on:
- The property's current assessed tax value
- The purchase price plus estimated repair costs
- Comparable sales of similar properties in renovated condition (Correct answer)
- The capitalization rate applied to projected post-repair rent
Correct answer: Comparable sales of similar properties in renovated condition
ARV is determined by analyzing recent sales of similar, already-renovated properties (comps) in the same area. It estimates what the property will be worth after improvements, not just cost plus repairs.
Question 6: The price-to-rent ratio is used by investors to:
- Determine how much rent to charge relative to operating costs
- Compare the cost of buying versus renting in a given market (Correct answer)
- Calculate the annual return on equity
- Measure how quickly a property appreciates in value
Correct answer: Compare the cost of buying versus renting in a given market
Price-to-Rent Ratio = Median Home Price ÷ Annual Median Rent. A high ratio suggests buying is expensive relative to renting (favoring renters), while a low ratio indicates a market more favorable to buyers and landlords.
Real Estate Investing Property Analysis 1
The Gross Rent Multiplier (GRM) is calculated by: