F & E RE

Mr. Roberto Garcia obtained a housing loan from a bank to purchase a condominium unit.

During loan orientation, he was informed that aside from repaying the principal, he must also pay

an additional amount as compensation for the use of borrowed money over time. Which

statement best explains this additional payment?

• It refers to a government-imposed tax collected upon transfer of ownership in real estate

  transactions.

• It refers to the compensation paid by the borrower to the lender for the use of borrowed

  capital over a specified period of time.

• It refers to the rental income generated by the property during the holding period of

  ownership.

• It refers to the increase in property value caused by inflation and market demand over time.

Answer explanation

Interest is the cost of borrowing money and represents compensation to the lender for allowing the borrower to use capital over time. It is not a tax, rental income, or appreciation in value. In real estate finance, interest is a core concept in loan amortization and financing structures.

Ms. Patricia Lim acquired a townhouse through bank financing. She was informed that her

monthly payments will include both principal and interest, and that each payment gradually

reduces her outstanding loan balance until full payment is completed. What does this repayment

structure describe?

• A loan structure where only interest is paid monthly while principal is settled at the end of

  the loan term.

• A systematic repayment process where each installment reduces both principal and interest

  until the loan is fully paid.

• A situation where the loan balance increases due to unpaid interest accumulation over time.

• A rental arrangement where payments are applied toward lease obligations instead of

  ownership acquisition.

Answer explanation

Amortization refers to gradual repayment of a loan through periodic payments that include both principal and interest. Each payment reduces the outstanding balance until the loan is fully extinguished.

Mr. Jonathan Reyes, a licensed real estate broker and investor, is currently evaluating a

commercial property located in Makati City, and before making any purchase decision, he

carefully studies the property’s rental income history, operating expenses, vacancy risks, and

prevailing market conditions in the area to determine whether the investment will yield favorable

returns over time. What activity is Mr. Reyes performing?

• He is conducting a legal title verification process with the Registry of Deeds to confirm

  ownership authenticity and encumbrances affecting the property.

• He is performing a real estate investment analysis that involves evaluating income potential,

  expenses, risks, and market conditions to determine investment profitability.

• He is computing tax obligations such as capital gains tax and documentary stamp tax prior to

  property acquisition and transfer.

• He is preparing subdivision development plans and securing zoning clearance from the local

  government unit for future land development.

Answer explanation

Investment analysis focuses on evaluating financial feasibility, risk exposure, and return potential of a property before acquisition.

Ms. Liza Santos invested in a real estate development project where she estimated future cash

inflows over several years and discounted them using a required rate of return to determine

whether the investment would be profitable, but after computation, she obtained a negative Net

Present Value result. What does this result indicate in financial decision-making?

• The investment guarantees profitability regardless of discount rate changes because future

  cash flows exceed initial costs.

• The investment will break even exactly because total inflows and outflows are equal over the

  holding period.

• The investment is expected to generate insufficient returns when considering the time value

  of money, making it financially unattractive under current assumptions.

• The investment is risk-free because negative results indicate conservative financial

  forecasting methods.

Answer explanation

A negative NPV means discounted inflows are less than outflows, indicating loss under current

assumptions.

Mr. Carlo Mendoza applied for a housing loan amounting to ₱8,000,000 for a condominium

unit that has been appraised at ₱10,000,000, and upon evaluation, the lender considered the

loan relatively high-risk due to the borrower’s limited equity contribution. What is the lender

primarily concerned about?

• The borrower has excessive equity in the property, which reduces lender participation in

  long-term appreciation gains.

• The borrower has low equity contribution, which increases lender exposure to potential

  financial loss in case of default or foreclosure.

• The property is located in a high-demand market, ensuring guaranteed appreciation

  regardless of borrower performance.

• The borrower’s income level exceeds the property value, eliminating the need for loan

  approval.

Answer explanation

Low borrower equity increases lender risk because less collateral cushion exists in case of default.

Mr. John owns a rental condominium unit in Muntinlupa City that generates monthly rental

income, and after deducting all operating expenses, property taxes, and monthly loan

amortizations, he still realizes a positive surplus cash at the end of each month. What does this

situation indicate?

• The property is financially stable because it generates sufficient income to cover all

  obligations while still producing excess cash for the owner.

• The property is operating at a loss but may recover its value through long-term appreciation

  in the real estate market.

• The property is not generating income but is increasing in value due to market speculation

  and demand.

• The property has no remaining financial obligations and is considered fully paid and debt-

  free.

Answer explanation

Positive cash flow means income exceeds both operating and financing costs.

Ms. Teresa operates an apartment building where she calculates total rental income and then

deducts operating expenses such as maintenance costs, property management fees, insurance,

and property taxes, while deliberately excluding mortgage payments and income taxes in the

computation. What financial measure is being computed?

• Gross income, which represents total rental income before any deductions or adjustments

  are made.

• Net operating income, which reflects income after operating expenses but before financing

  costs and taxes.

• Cash-on-cash return, which measures profitability based on actual cash invested in the

  property.

• Capital appreciation gain, which measures increase in market value over time regardless of

  income.

Answer explanation

NOI excludes financing and taxes, focusing purely on operational performance.

A commercial property generates an annual Net Operating Income of ₱1,480,000 and is

currently valued at ₱15,000,000, resulting in a capitalization rate of approximately 9.87 percent,

which is commonly used by investors to evaluate income-generating properties. What does this

capitalization rate indicate?

• The property guarantees fixed income regardless of tenant occupancy, vacancy risk, or

  market fluctuations.

• The property provides an estimated rate of return based on income relative to value, where

  higher cap rates generally indicate higher risk and higher potential return.

• The property is overvalued in the market and should be immediately disposed of without

  further analysis.

• The property does not generate sufficient income and is therefore not suitable for investment

  purposes.

Answer explanation

Cap rate reflects return based on income; it is a risk-return indicator.

Mr. Jonas invested ₱2,200,000 in cash to acquire a rental property and, after paying all

operating expenses and mortgage obligations, he earns an annual net cash flow of ₱315,000 from

the investment. What does this financial metric measure?

• It measures total appreciation of the property value in the real estate market over a given

  period of time.

• It measures annual return based on actual cash invested, showing how efficiently the

  investor’s capital generates income.

• It measures total mortgage amortization payments made to the lender annually.

• It measures gross rental income before deducting expenses and debt service obligations.

Answer explanation

Cash-on-cash return measures return on actual invested cash, not total property value.

A rental property generates an annual Net Operating Income of ₱800,000 while its total

annual debt service requirement, including principal and interest payments, amounts to

₱600,000. What does a DSCR of 1.33 indicate in this situation?

• The property is generating insufficient income to meet its debt obligations, indicating

  financial instability and risk of default.

• The property is generating 1.33 times the income required to cover its debt service, indicating

  strong repayment capacity and financial stability.

• The property has been fully paid off and no longer carries any financial obligations to lenders.

• The property is operating at a loss and may be subject to foreclosure proceedings by the

  lender.

Answer explanation

DSCR above 1 means income exceeds debt obligations.