Financial Analysis for Properties Flashcards

When using the income capitalization approach to value a property, which formula is used?

Answer: Value = NOI ÷ Cap Rate

The income capitalization approach divides NOI by the market capitalization rate to estimate property value.

A property's total acquisition cost is $800,000, financed with a $640,000 mortgage. What is the loan-to-value (LTV) ratio?

Answer: 80%

LTV = Loan Amount ÷ Property Value = $640,000 ÷ $800,000 = 80%.

Which analysis technique projects the cumulative financial returns of a property over a multi-year holding period?

Answer: Discounted cash flow analysis

DCF analysis projects all future cash flows and reversion proceeds, then discounts them to present value over a defined holding period.

Which expense is classified as a capital expenditure rather than an operating expense?

Answer: Roof replacement

A roof replacement is a capital expenditure because it extends the useful life of the property, unlike routine operating expenses.

A manager notices the operating expense ratio has increased from 42% to 51% year-over-year. What is the most likely implication?

Answer: Profitability has decreased due to rising costs relative to income

A rising operating expense ratio signals that expenses are consuming a greater share of income, reducing NOI and profitability.

What is the internal rate of return (IRR) in real estate investment analysis?

Answer: The discount rate that makes the net present value of all cash flows equal zero

IRR is the discount rate at which the present value of future cash flows equals the initial investment, making NPV = 0.

In property accounting, which method recognizes revenue when it is earned regardless of when cash is received?

Answer: Accrual basis accounting

Accrual accounting records revenues when earned and expenses when incurred, not when cash changes hands.