Real Estate Investments
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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.…
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Imagine you own a commercial real estate property that is leased under a 10-year fixed-rate contract. Once the contract expires, you will need to re-lease the property for another 10 years at a new rental rate. How should we evaluate the cash flows generated in this way and, consequently, the value of the real estate…
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The Inventory Dynamics Model describes the equilibrium dynamics and cyclicality of the real estate market. (The model is associated with Kenneth Rosen, William Wheaton, Patric Hendershott, and others.) The core model consists of six equations, though it can be modified (as I did to adapt it to the Tbilisi market). The content of the equations…