Real Estate Investments
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The term “effective rent” is used to evaluate and compare the profitability of leased real estate. In essence, it represents the present value of rental income, translated across time periods. It is a useful metric when we want to compare two lease offers with different terms, either from the landlord’s or tenant’s perspective. First, I…
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Investments in real estate consist of various stages, and at each stage, both the risk and the corresponding expected return (Opportunity Cost of Capital) differ. Initially, risks are high, but as more investment is made, future forecasts become clearer and the level of risk decreases. Source: Commercial Real Estate Analysis and Investments, D. M. Geltner,…
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So when should land development actually occur? We know that postponing a project has value, just like an option, and this affects the price of land. Using a simplified real options approach, we can calculate the option premium from a one-year delay perspective. We can also make the model more complex, using binomial trees to…
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Fixed-income assets come with default risk. For example, the default probability statistics for commercial mortgages by years since loan origination look like this: Source: Commercial Real Estate Analysis and Investments by D. M. Geltner, N. G. Miller, J. Clayton, P. Eichholtz In the event of default, it is often impossible to recover the full amount…
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For a real estate investor, it’s important to understand how valuable a loan refinancing option is, which can be assessed using the Black-Scholes financial options pricing model. For example, on a $100,000, 10-year mortgage loan, the value of this option came out to be $32,600. This represents the value of the borrower’s asset, which is…
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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…