Real Estate Investing Investment Property Analysis 2 β Questions and Answers
Question 1: A duplex generates $3,200/month gross rent with $1,400/month in operating expenses. What is the annual Net Operating Income (NOI)?
- $21,600 (Correct answer)
- $38,400
- $16,800
- $25,600
Correct answer: $21,600
NOI = (Gross Rent β Operating Expenses) Γ 12 = ($3,200 β $1,400) Γ 12 = $21,600.
Question 2: Which metric best compares the income-generating efficiency of properties with different purchase prices?
- Cap rate (Correct answer)
- Gross rent multiplier
- Cash-on-cash return
- Debt service coverage ratio
Correct answer: Cap rate
Cap rate (NOI Γ· property value) normalizes income relative to price, enabling apples-to-apples comparisons.
Question 3: An investor purchases a rental property for $400,000 with $80,000 down. Annual cash flow after debt service is $6,400. What is the cash-on-cash return?
- 8% (Correct answer)
- 1.6%
- 12%
- 6%
Correct answer: 8%
Cash-on-cash return = Annual Cash Flow Γ· Total Cash Invested = $6,400 Γ· $80,000 = 8%.
Question 4: What does a Gross Rent Multiplier (GRM) of 10 indicate?
- It takes 10 years of gross rents to equal the purchase price (Correct answer)
- The property has a 10% cap rate
- Operating expenses are 10% of gross income
- The property cash flows 10% annually
Correct answer: It takes 10 years of gross rents to equal the purchase price
GRM = Purchase Price Γ· Annual Gross Rent, so GRM of 10 means price equals 10 years of gross rents.
Question 5: When analyzing a commercial property, a DSCR of 1.0 means:
- NOI exactly covers annual debt service with no surplus (Correct answer)
- The property generates no income
- Loan payments are double the NOI
- The investor breaks even after taxes
Correct answer: NOI exactly covers annual debt service with no surplus
DSCR = NOI Γ· Annual Debt Service; a DSCR of 1.0 means income just covers the loan payments with nothing left over.
Question 6: A property has a 7.5% cap rate and an NOI of $30,000. What is the estimated market value?
- $400,000 (Correct answer)
- $225,000
- $300,000
- $450,000
Correct answer: $400,000
Value = NOI Γ· Cap Rate = $30,000 Γ· 0.075 = $400,000.
Question 7: Which expense is typically EXCLUDED from the calculation of Net Operating Income?
- Mortgage principal and interest payments (Correct answer)
- Property taxes
- Insurance premiums
- Property management fees
Correct answer: Mortgage principal and interest payments
NOI is calculated before financing costs; mortgage payments are a financing expense, not an operating expense.
Real Estate Investing Investment Property Analysis 2
A duplex generates $3,200/month gross rent with $1,400/month in operating expenses.
What is the annual Net Operating Income (NOI)?