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How Do Government Co-Financing Incentives Influence Real Estate Purchase Decisions? How Do Such Incentives Affect the Value of Real Estate for Beneficiaries? In practice, determining the correct discount rate for real estate valuation is a challenging task due to the complex relationship between leverage and the effective tax rate. This relationship is influenced by factors…
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When investing in real estate, significant attention is given to the tax savings derived from depreciation (Depreciation Tax Shield – DTS), and this benefit becomes even more valuable when financial leverage is used. In the table below, the left two columns show the pre-tax and post-tax IRR of cash flows when purchasing a property without…
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Unlike regular corporations, the tax component is excluded here because REITs are not subject to corporate income tax. There is nothing special about this formula—it simply weights the returns on debt and equity. However, what I found interesting is that through this weighting, we arrive at both positive and negative Cash-on-Cash leverage. First, take a…
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When discussing the risk-return diagram, the risk component is often perceived theoretically. In this note, I will mathematically demonstrate how financial leverage and risk are essentially the same (all else being equal), how leveraging real estate affects the expected return on average, and how it proportionally influences the range of uncertainty around that expected return.…
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Real estate investing differs from both securities market operations and corporate capital budgeting decisions—it is, in essence, a blend of the two. On one hand, investing in real estate resembles corporate investment decisions in projects, fixed assets, production lines, inventories, etc. All such decisions, including real estate investments, are evaluated based on generated cash flows.…
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The property is leased under a long-term contract, and for discounting cash flows, the lessee’s loan rate is used (which is logical). The same rate can be used for discounting the cash flows generated within each subsequent contract. For example, if I know that after 10 years, I will have a new 10-year contract, then…
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Smart investors use IRR less frequently because it has many technical flaws, but the main issue is that IRR inherently assumes the reinvestment rate is the same as the IRR itself. This implies that positive cash flows can be reinvested at the same rate, which is an unrealistic assumption, especially for projects with high IRRs.…