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Real Estate Finance Problem Set

1. The difference between the rate of return on assets and the cost of borrowing is:
(A) financial leverage
(B) spread
(c) debt service
(D) none of the above

2 When the rate of return on assets exceeds the cost of borrowing, it represents:
(A) negative spread
(B) positive spread
(C) favorable spread
(D) unfavorable spread

3 If the real estate investment that is being financed is the investor's sole asset, the investor's debt-to-equity ratio will be:

(A) the same as the loan-to-value ratio
(B) greater than the loan-to-value ratio
(C) less than the loan-to-value ratio
(D) unrelated to the loan-to-value ratio

4. A property has a potential gross rent of $1,500,000; operating expenses of $765,750; a vacancy allowance of $45,000, and other income of $9,000. What is its effective gross income?

(A) $1,455,000
(B) $1,464,000
(C) $698,250
(D) none of the above

5. In contemporary risk analysis:
(A) risk is defined as the measurable likelihood of variance from the most probable outcome
(B) no attempt is made to quantify risk
(C) the terms risk and uncertainty are used synonymously
(D) investors are viewed as being risk-neutral

Solution Preview

1. B. This is the definition of a spread in real estate finance.

2. A. The term "unfavorable spread" does not exist in real estate finance, only "unfavorable leverage" which is a different concept.

3. B. Please see the computations below which will explain this in better detail:
Loan to value ratio = ...

Solution Summary

This solution discusses various real estate finance concepts.