CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

Consider the following real estate investment.

The property is a 20-unit apartment building that is 10 years old and in excellent condition. The asking price is $700,000. The investor plans to contribute $140,000 in cash and finance the balance of the purchase with a $560,000 mortgage loan at 10% interest for 30 years with monthly payments.

The investor plans to sell the property after 4 years and anticipates paying selling costs of 6% of the sales price. The value of the property is expected to increase 2.5% annually over the 4-year holding period.

The potential rent for the building is $625 per month per unit and is expected to increase 3% per year. Total vacancy and bad debt losses are projected at $6,000 per year, with 2% growth per year.

Annual operating expenses include $30,000 for maintenance, $8,000 for property taxes, and $2,500 for property insurance. All operating expenses are expected to increase 2% annually. The property is depreciated using the straight-line method over 27.5 years, with an original depreciable basis of $650,000 (land valued at $50,000).

The investor is in the 28% marginal income tax bracket, faces a 20% capital gains tax rate, and desires a minimum after-tax rate of return of 15%.

Which of the following would not be considered in computing net operating income?
A. depreciation.
B. property taxes.
C. maintenance.
Explanation: Depreciation is a non-cash expense and is not considered as part of net operating income. The tax-benefit of depreciation is considered in computing after-tax cash flow, but not as part of net operating income.

User Contributed Comments 8

User Comment
alki long q, short answer
pierreE14 I spent more time reading the question than thinking about the answer lol
bobert Yeah, on long questions like this, always read the question first, for 2 reasons.

1) you know what to look for, and
2) you may not need to actually read every bit of detail if the question is not looking for an answer that would need it all, saving a lot of time to be spent elsewhere.
jwebbs you mean read the answer first? because if you do that and u know NOI then thats all you need to do. screw reading it
olagbami yeah men. i didnt bother reading d question. just went straight to the last phrase.
rocyang ok, ladies and gentlemen, my utimate trick for doing questions, like picking stocks: buttom up!
endurance If you know how to calculate NOI, you don't need to read the text, just read the question
dotepx you're the bus driver
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