Free practice questions · Course 4
Income Analysis for Investment Properties Practice Questions
NOI, cap rates, cash-on-cash return, and basic DCF analysis. Below are 5 free sample questions from our 105-question Income Analysis for Investment Properties bank. Each comes with the correct answer and a full explanation.
Question 1 of 5
An investor compares two properties using GRM. Property X has gross rent of $90,000 and a sale price of $810,000. Property Y has gross rent of $120,000 and a sale price of $1,140,000. Which has the lower GRM, and what does that suggest?
- AProperty X (GRM 9.0); a lower GRM may indicate a relatively cheaper price per dollar of gross rent
- BProperty Y (GRM 9.5); a lower GRM means it is more expensive
- CBoth have identical GRMs, so they are economically equivalent
- DProperty X has GRM of 0.111, indicating a high yield
Why A is correct
Lower GRM means you pay fewer dollars per dollar of gross rent, which on its face appears cheaper. But because GRM ignores operating expenses, vacancy, and capital structure, it cannot replace the cap rate. Treat GRM as a screening tool only.
Question 2 of 5
When using the income approach, the Appraisal Institute of Canada recommends that the cap rate be derived primarily from:
- AThe investor's required rate of return
- BSales of comparable income-producing properties in the same market
- CThe average mortgage interest rate quoted by major Canadian banks
- DThe municipal property tax rate plus a premium
Why B is correct
The Appraisal Institute of Canada favours market-extracted cap rates derived from arms-length sales of comparable income-producing properties. Build-up methods (e.g., band-of-investment, mortgage-equity) and surveys are secondary support when comparable sales are scarce.
Question 3 of 5
An investor buys a property for $5,000,000 and resells it after five years. During the holding period, NOI is roughly $325,000 per year. Sale price at exit is $5,800,000. Without considering financing or taxes, which calculation BEST approximates the holding period total return?
- A(Total NOI received + Sale Price - Purchase Price) / Purchase Price
- BSale Price / Purchase Price
- CPurchase Price - Total NOI received
- DNOI / Sale Price
Why A is correct
Holding-period return aggregates ordinary cash flows and capital gains. To time-weight properly, analysts use IRR; for a quick measure, they use the total dollar return divided by initial capital. Neither version replaces the other — they answer different questions.
Question 4 of 5
An investor's underwriting shows the property's IRR is 11 percent over a 5-year hold, but the cash-on-cash return in Year 1 is only 4 percent. The MOST plausible explanation for the gap is:
- ASignificant value is generated by reversion (sale proceeds), which IRR captures but Year-1 cash-on-cash does not
- BCash-on-cash is always higher than IRR
- CErrors in the underwriting
- DThe lender is incompetent
Why A is correct
When IRR substantially exceeds cash-on-cash, much of the deal's projected return depends on the exit. That heightens dependency on the reversionary cap rate assumption. Sensitize the exit cap and watch what happens to IRR — it is often the deal's biggest swing factor.
Question 5 of 5
How is the capitalization rate (cap rate) defined in commercial real estate?
- AAnnual debt service divided by purchase price
- BNet Operating Income divided by property value or purchase price
- CGross income divided by purchase price
- DCash flow after taxes divided by equity invested
Why B is correct
Cap rate is the most common metric for comparing income properties. It assumes an all-cash purchase and reflects market expectations of risk and growth.
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