Real Estate Basics · Level 5 of 5 · Capstone

Capstone: investing and analysis

Evaluate a rental property with cash flow, cap rate, and risk checks.

Study notes

Net operating income (NOI) is rental income minus operating expenses such as taxes, insurance, repairs, management, and vacancy. It excludes mortgage payments.
Cap rate is NOI divided by the property price. It compares properties without considering financing.
Cash flow is what remains after operating expenses and debt service. Cash-on-cash return is annual cash flow divided by the cash you invested.
Leverage increases both gains and losses. A vacancy or big repair can turn positive cash flow negative.
Check zoning, rental rules, short-term rental limits, HOA rules, insurance cost, and reserves before you buy.

Quiz: 6 questions

Choose one answer for each question, then check your answers. Score 5 of 6 to pass. Then enter your name and email to download a PDF certificate and have a copy emailed to you. Answers are graded in your browser.

1. Annual rent is $30,000 and operating expenses are $12,000. NOI is:

$18,000 $42,000 $30,000 $12,000

2. A property with $18,000 NOI costs $300,000. Cap rate is:

6% 18% 1.6% 60%

3. Does NOI include mortgage payments?

No, NOI excludes debt service Yes, always Only for condos Only in leap years

4. You invested $60,000 cash and the property makes $4,800 a year in cash flow. Cash-on-cash return is:

8% 4.8% 12.5% 80%

5. Why keep cash reserves for a rental?

Vacancies and repairs can make cash flow negative Reserves raise the cap rate Lenders forbid them Reserves replace insurance

6. Before buying a home to rent as a short-term rental, you should check:

Local short-term rental rules and HOA rules Only the paint color Only the listing photos Nothing; all homes allow it

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