REAM Financial Analysis & Valuation 2

Question 1

In a real estate discounted cash flow model, what does a positive Net Present Value (NPV) indicate?

Accepted Answer

The present value of projected cash flows exceeds the initial capital invested

Answer

The property will appreciate in value above the rate of inflation

Answer

The investment's IRR equals the investor's required rate of return exactly

Answer

The property generates positive cash flow in every year of the holding period

Question 2

An investor contributes $500,000 in equity and receives total distributions of $1,250,000 over a five-year hold. What is the equity multiple?

Accepted Answer

2.5x, calculated as $1,250,000 divided by $500,000

Answer

1.5x, representing a 50% total return on invested capital

Answer

2.0x, representing a complete doubling of invested equity

Answer

0.4x, calculated as equity invested divided by total distributions

Question 3

What does the Operating Expense Ratio (OER) measure in real estate financial analysis?

Accepted Answer

Operating expenses expressed as a percentage of effective gross income

Answer

Total property expenses including debt service relative to gross revenue

Answer

Net operating income as a proportion of total appraised property value

Answer

The ratio of capital expenditures to recurring annual operating costs

Question 4

A property has potential gross income of $400,000, operating expenses of $120,000, and annual debt service of $80,000. What is the break-even occupancy rate?

Accepted Answer

50%, calculated as total operating expenses plus debt service divided by potential gross income

Answer

30%, the share of income consumed by operating expenses alone

Answer

20%, the minimum occupancy needed to cover debt service only

Answer

80%, a conservative institutional lender underwriting threshold

Question 5

Which formula correctly calculates Effective Gross Income (EGI) for an investment property?

Accepted Answer

Potential gross income minus vacancy and credit losses plus other income

Answer

Potential gross income plus capital expenditure reserves

Answer

Gross collected rents minus property management fees only

Answer

Net operating income plus total operating expenses incurred

Question 6

What is Potential Gross Income (PGI) in real estate financial modeling?

Accepted Answer

The total scheduled rental income assuming 100% occupancy at market or contract rates

Answer

The income actually collected from tenants after deducting all vacancy losses

Answer

The maximum income achievable after completing planned capital improvements

Answer

Total rental income plus all ancillary revenue streams less management fees

Question 7

In a discounted cash flow analysis, how is the exit (terminal) cap rate typically applied?

Accepted Answer

It is applied to the projected NOI at the end of the holding period to estimate resale value

Answer

It is applied to the first-year NOI to determine the acquisition price

Answer

It replaces the going-in cap rate whenever market conditions deteriorate significantly

Answer

It equals the going-in cap rate minus the property's expected annual rent growth rate