Florida Real Estate. Ch 17. Real Estate
Investments and Business Opportunity
Brokerage
Appreciation- - answerAn increase in value.
Asset- - answerAnything of value.
Cash Flow- - answerThe resulting amount when annual debt service, tax liability, and
capital improvement costs are subtracted from net operating income.
Equity- - answerThe market value of a property less any debt against it; in a business
entity, assets minus liabilities equals capital (owner's equity); a system of legal rules
administered by a court of chancery.
Leverage- - answerThe use of borrowed funds to finance the purchase of an asset; the
use of another's money to make more money.
Liquidity- - answerThe ability to convert noncash assets into cash quickly; refers to a
firm's cash position and its ability to meet obligations.
Basis- - answerThe initial cost of an investor's property.
Capital Gain (or Loss)- - answerThe profit (or loss) from the sale of an asset, including
real property.
Tax Shelter- - answerAn investment that shields items of income or gain from payment
of income taxes; a term used to describe some tax advantages of owning real property
(or other investments), including postponement or even elimination of certain taxes.
Real Estate Investment Trust (REIT)- - answerA method of pooling investment money
using the trust form of ownership.
Risk- - answerThe chance of losing all or a part of an investment; the uncertainty of
financial loss.
Equity is the property's value minus fixed expenses.
A. True
B. False - answerB. False
, Equity is the property's value minus mortgage debt.
Negative leverage occurs when the benefits of borrowing exceed the costs of
borrowing.
A. True
B. False - answerB. False
The statement is false. If the benefits of borrowing exceed the costs of borrowing, it is
called positive leverage. If the borrowed funds cost more than they are producing, it is
called negative leverage.
The ability to sell an investment quickly without loss of capital is called leverage.
A. True
B. False - answerB. False
The statement is false. Liquidity refers to the ability to sell an investment very quickly
without loss of capital.
A lack of maintenance is called deferred maintenance.
A. True
B. False - answerA. True
The statement is true. A lack of proper maintenance is called deferred maintenance.
Real estate investments require active management.
A. True
B. False - answerA. True
The statement is true. One of the disadvantages of investing in real estate is the need
for active management.
An advantage of investment in real estate is that real estate is typically highly leveraged.
A. True
B. False - answerA. True
The statement is true. An advantage of real estate investments is the leverage of
borrowed money. An investor can usually borrow 70%-75% of the appraised value to
finance a real estate investment.
A disadvantage of investing in real estate is the relatively high degree of risk.
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