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ARMs were designed to help lenders combat unanticipated inflation changes and interest rate changes
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The default risk of a FRM is higher than the default risk of an ARM.
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REI tt 2
Real Estate Investment 2
| Question | Answer |
|---|---|
| ARMs were designed to help lenders combat unanticipated inflation changes and interest rate changes | T |
| The default risk of a FRM is higher than the default risk of an ARM. | F |
| . A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%. The borrower can earn 12% on alternative investments of comparable risk so he would be better off by not borrowing the extra 14%. | T |
| A housing bubble occurs when there is a big increase in the supply of homes. | F |
| To attract anchor tenants, property owners tend to charge them lower rents. However, property owners get compensated by charging higher operating expenses from the anchor tenants | F |
| One advantage of the gross income multiplier approach to appraisal is that it is most suitable for properties in which operating expenses vary widely across the properties being surveyed | F |
| Capitalization rate of newly constructed apartment building will be more than that of relatively old apartment building, which is comparable in all other aspects. | F |
| CPI adjustments shift the risk of unexpected inflation is shifted to the lessor. | F |
| To determine whether leverage is positive or negative, the investor needs to determine whether the IRR is greater than market rate of interest on mortgage loans. | F |
| From lender’s perspective, participation loan is preferred during an inflationary environment | T |
| Which of the following is a disadvantage of PLAMs | The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price. |
| Which of the following is TRUE regarding the incremental cost of borrowing? | It should be compared to the cost of obtaining a second mortgage |
| The subject of an appraisal has only two bedrooms, but one of the comparables used in the appraisal has three. If the adjustment for a third bedroom is $5,000, the adjustment would be: | A $5,000 decrease to the comparable's selling price |
| Which of the following is FALSE regarding cap rates? | Rising interest rates generally tends to lower cap rates |
| Which of the following is FALSE regarding an expense stop? | All operating expenses are covered by the stop |
| A property is financed with a 75% loan at 11.5% over 25 years. The property produces an ATIRR on total investment of 8.2% based on a tax rate of 31%. What can be said about the leverage associated with the property? | Positive leverage exits |
| 1. Explain the asymmetric risk-taking by the lender due to interest rate fluctuations and give two solutions to the problem. | Solution: 1. Charge prepayment penalty to maintain the expected yield 2. Make the loan callable during its maturity |
| Give at least three reason why leasing is preferred to owning | 1. Required space is small 2. Owning requires large capital commitment 3. Owning reduces the operating flexibility 4. loss of focus on its core business |
| In preparing a valuation, why is it of importance to understand the most likely type of buyer of a property? | There are several types of investors which have different investment strategies. They have different perspectives regarding the holding period, financing and risk appetite. Since they differ from each other, their required return varies. |
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