Real Estate Exam 1 Study Guide Chapter 1 review questions scarcity 1 Economists suggest that the value of something results from its utility and 2 A branch of economists that extends the basic ideas of the early classical and neoclassical economists to better understand and predict how humans use space is termed urban economics 3 Formal arrangements and associations that members of society make to support fundamental economic and social activities are referred to in the text as institutions 4 Marshall contended that in a perfect market the value of a good was equal to its price 5 Commercial mortgages held in the portfolios of lenders are generally referred to as unsecuritized commercial mortgages 6 Stocks bonds and cash are generally classified as financial assets 7 Real estate in the United States represents approximately what portion of the 8 Approximately 75 of the wealth of real estate in the U S accrues to residential world s wealth 15 property 9 According to the text business real estate excluding farmland accounts for approximately 15 of the total value of real estate in the U S 10 The text organized to describe the following five perspectives of real estate investment market valuation mortgage finance and legal True False 1 Early economists concluded that land labor and credit were the resources of society that were combined by entrepreneurs to form useful products FALSE The resources combined to form useful products in society are land labor and capital 2 Alfred Marshall an economist argued that value results from the intersection of supply cost and demand utility TRUE 3 Urban economics constitutes a branch of economics that focuses on urban problems especially housing issues TRUE 4 The fundamentals of supply and demand explain all aspects about individual and market behavior in valuing space FALSE much behavior is still unexplained In addition to affection market operations lease contracts serve to formally identify a property s rent and the intersection of supply and demand TRUE 6 Real estate can be classified as both a financial asset and a real asset TRUE 5 7 Consistent with an open economy most of the land in every state in the U S is privately owned FALSE most of the land in Alaska is owned by the government 8 According to the text real estate represents about of the world s wealth TRUE 9 Real estate constitutes the most valuable component of the U S real estate market FALSE 10 Commercial real estate owners carry more debt as a percentage of the total property value than residential property owners FALSE Residential 44 1 Commercial 24 6 Chapter 2 review Go over calculation problems and learn how to use the N I PV PMT and FV buttons on your calculation correctly Amortization a partial repayment of principal Capitalization rate calculated as the expected cash flow in year one divided by the initial acquisition price it is a measure of the current relationship between a property s income stream and price Debt service Loan payments made to satisfy outstanding debt obligations Effective cost The true borrowing cost including the effect of up front financing costs Effective yield The yield actually earned by the investor Interest The adjustment required to equate the value of money received at two different points in time Interest only loans Mortgage loans that do not require any amortization of principal over the loan term Internal rate of return The rate of interest which equals the present values of the cash inflows to the present value of the cash outflows Investment value the value of the property to a particular investor Loan amortization schedule a table showing the breakdown of a fixed mortgage payment between interest and the return of principal Market value the price a typical buyer would pay should the property be placed on the market for sale Net present value the difference between the present value of the cash inflows and the present value of the cash outflows Sinking fund factor the adjustment used to find an annuity payment Yield to maturity the yield on an investment project if held until maturity Chapter 3 Review review calculation problems True False 1 An investment philosophy outlines mainly whether the real estate investor will be 2 The rental rate specified in the lease contract is termed market rent FALSE it an active or passive investor TRUE is termed contract rent 3 While income property markets are local most income properties tend to be purchased by national investment companies such as REIT s FALSE income property markets may be national but are mostly purchased by local investors 4 The presentation of projected contract rents in the first year of operation is known as the property s rental roll TRUE 5 An often critical step in reconstructing the operating statement for a property to determine its value is evaluating whether the existing contract rents are equal to market rents TRUE 6 The current rent that can be obtained by offering the property in the open market is termed the market rent TRUE 7 Net operating income minus leasing and capital costs is termed by the text the before tax cash flows FALSE cash flow before debt service and income tax 8 Major property improvement expenses that do not occur on a frequent and periodic basis such as roof replacements tenant improvements and leasing commissions are referred to as fixed costs False leasing capital costs 9 The net selling price is estimated by subtracting the expected selling expenses from the expected selling price TRUE 10 The discount rate at which the NPV of the cash flows from an investment equal zero is termed the break even point FALSE it s termed the IRR Chapter 4 Review You can protect of an acre of homeland in Florida within city limits and or 160 acres outside city boarders Four classes of real property 1 Real estate held as a personal residence 2 Real estate held for sale to others dealer property 3 Real estate held for use in a trade or business trade or business property 4 Real estate held as an investment for the production of income investment property Three types of income subject to federation taxation 1 Active income 2 Portfolio income 3 Passive activity income Depreciation length is 27 5 years for residential and 39 years commercial Highest personal tax rate is 35 The capital gain rate is 15 Another name for a Like Kind Exchange is a SEC1031 transfer Homeowners are permitted to exclude from taxable income up to 250 000 of the capital gain realized on the sale of