SPLAT
What is the biggest reason people invest in real estate?
To make money
What is the equation for Cash Flow
Income - Expenses
What is the increase in average level of prices, or the decrease in the value of money?
Inflation
The business cycle and real estate cycle are linked. Which one follows the other one?
Real estate follows the business cycle
How do you calculate budget variance?
actual-budgeted
What are the 5 Fundamental Investment Objectives?
Safety, Periodic Return, Leverage, Appreciation, Tax Shelter
What is the income from Cash Flow Yield (ROI)?
Cash Flow/Investment
What is a term for the "price" of borrowing money
Interest rate
What is the commingling of funds?
The combining of funds of several owners or combining owners' funds with management company's funds (is illegal in many states and viewed as ethically wrong)
What is zero based forecasting? Name one reason you would use this as opposed to history based forecasting.
De-emphasizes the historical role of income and expenses in creating the current budget and emphasizes the development of a management plan.
An owner seeks an investment that will produce an increasing cash flow for them over the next 50 years into retirement. What objective is this fulfilling?
Periodic Return
An apartment produces $500,000 in income, and costs $375,000 to run. What is the Cash Flow?
$125,000
Why do Shopping Centers have the most complex accounting needs?
In addition to normal operating costs, maintenance, taxes, insurance and more, there is an added element of percentage rent which requires collecting and analyzing sales reports and billing tenants accordingly.
What are the 4 major phases of the Real Estate Cycle?
Overbuilding, Adjustment, Stabilization, Development.
When determining if a variance is favorable or unfavorable, we look to see how it affected what?
NOI. More money for us is favorable, less money is unfavorable.
An owner buys a property that is not making or losing money in terms of Cash Flow, but is located in a great location. What fundamental investment objective could they be utilizing?
Safety
You invest a cool million into a property that is has income of $250,000 a year. How low should you keep your expenses if you want to make back your invested amount in 10 years (10% ROI)? (Assuming no interest or inflation)
$150,000
You have 10 apartments that all owe 500 dollars for rent each month. Only 8 of them paid. Using cash-basis accounting, how much money did you make this month? Using Accrual basis accounting, how much money did you make this month?
Cash basis- 4000
Accrual basis - 5000
CPI stands for what? And how is it determined?
Consumer Price Index - looks at cost of a basket of goods to measure changes in the average level of prices reliably.
You budgeted your GPI (gross potential income) to be 1,000,000 and your actual income ended up being 950,000. What is your variance? What is your percentage change? Is this favorable or unfavorable?
-50000, -5%, unfavorable
Inflation is increasing, as are wages and we can expect an increase to rent due to the rising CPI. What will happen to the property's value and what fundamental owner investment objective would a purchase of this property fulfill?
This creates a higher rent value and a higher value to the property; Appreciation of capital appreciation.
Property 1 costs 2 million with $850,000 in income, but $500,000 in expenses.
Property 2 costs 1.5 million with $500,000 in income but $200,000 in expenses.
You are borrowing the money and have exactly 2 million to invest. What property should you buy and why
Property 1 is 17.5% return on investment
Property 2 is 20% return on investment
17.5% of full $2,000,000 is $350,000
20% of $1,500,000 is $300,000 with 500,000 left unused. 300,000/2,000,000 is 15%
So the answer is Property 1 for a higher ROI of total amount available to be invested.
You have a 4 unit property, and each unit pays $500 for rent. 3 of the 4 have paid. You also had to contract out maintenance for the furnace in 2 of the units this month which will cost 300 in each unit, but the bill doesn't arrive until next month. Using cash basis accounting, what is your cash flow this month? Using Accrual basis accounting, what is your cash flow this month?
Cash basis, 1500 income, 0 expenses = $1500 cash flow
Accrual basis = 2000 income - 600 expenses = $1400 cash flow
$1100
Your budgeted total income was 450,000. Your actual total income was 475,000. Your budgeted total expenses were 350,000. Your actual total expenses were 400,000. What is your variance in total income and your variance in total expenses. What is the percentage change? Is this unfavorable or favorable? Also, what is your budgeted total cash flow and actual total cash flow? What is the percentage change of your cash flow and is it favorable or unfavorable?
Income =
Variance = 475000-450000 = 25000
Percentage change = 5.56%
Favorable
Expenses =
Variance = 400000-350000 = 50000
Percentage Change = 14.29%
Unfavorable
Cash Flow
Variance = 75000-100000 = -25000
Percentage Change = -25%
Unfavorable