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REI tt 3
Real Estate Investment 3
| Question | Answer |
|---|---|
| Lenders can partially avoid estimating interest rates by tying an ARM to an interest rate index. | T |
| The default risk of a FRM is higher than the default risk of an ARM. | F |
| A borrower is considering refinancing and finds that the return, considering refinancing charges and lower payments, is 10%. The borrower can earn 12% on alternative investments so the property should be refinanced. | F |
| If interest rates decrease, the market value of a loan previously made will increase. | T |
| A housing bubble occurs when there is a big increase in the supply of homes. | F |
| When using the cost approach to valuation, current market data for land values must be obtained. | T |
| If a lease has free rent earlier in its term, its default risk might be considered slightly higher | F |
| When using the gross income multiplier approach to appraisal, potential gross income is preferred to effective gross income. | F |
| The use of a CPI index in lease contracts shifts risk to the landlord. | 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 |
| Which of the following closing costs do not increase the lender’s effective loan yield? | Insurance charges |
| 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 objective of appraisal is to | Establish the most probable price that would be paid for property under competitive market conditions |
| Which of the following is NOT normally considered when conducting an appraisal using the cost approach? | Capitalization rate |
| All other things being equal, which of the following best describes the effects of leverage on investment’s risk-return characteristics (assuming the expected return is greater than the lending rate)? | Higher average return, higher risk |
| Which of the following would typically NOT be used as a basis for a participation loan? | Potential gross income |
| Explain why investors should use debt. Please give 4 reasons. | 1) Not enough equity 2) Even with enough equity, borrowing is preferred in order to free up equity over other property investments -> diversification 3) Take advantage of tax deductibility on interest payment 4) Realize leveraged return |
| An investor is interested in applying for a fixed rate mortgage (CPM) to finance the acquisition of an office building. Please give your thoughts on this. | 1. inc. rises with inflation 2. inc.for a new building increases because it takes time to lease out the space 3. if the property has existing leases, the in. from the property will increase when these leases expire and rent will reset to the market level |
| What does the highest and best use principle mean according to RICS and how could it influence a valuation? | HABU of asset is the use of the a that max its product. and that is possible, legal permiss and financi feasible. HABU is import since the curr use of an asset might not be HABU. inv. may be pay a low yield than would be exp based on the curr use |
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