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Black-Scholes-Merton Model
The Black-Scholes-Merton (BSM) formula holds the same weight in financial science as E = mc² does in physics. The formula revolutionized the development of the options market. Thanks […]
Optimal Hedge Ratio
Hedging for Sales Support Organizations often need to enter into long-term sales contracts with fixed prices, even when some of their costs depend on market fluctuations. For example, […]
After Tax Discount Rate in RE
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 […]
Logistic Regression
Every important decision boils down to a “yes” or “no” choice – should I buy, or not buy? Should I offer a payment plan, or not? Should I […]
Depreciation Tax Shield in Real Estate
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 […]
Cash-on-Cash Leverage in Real Estate
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 […]
RE Leverage and Risk: A Mathematical Perspective
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 […]
The Specifics of Real Estate Investing
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 […]
Implied Inter-Lease Discount Rate
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 […]
IRR Decomposition
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 […]
Valuation of Long-term leases
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 […]
6 Equations Stock-Flow Model
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.) […]
Property Life Cycle
A property has a life cycle—it is created, ages, depreciates, and is eventually redeveloped. Because of this, investors view real estate as comprising two parts: land value and […]
City Development Models
Urban land use and density are shaped by economic principles and social factors. The classical monocentric city model provides a foundation for understanding urban spatial economics, but real-world […]
How Uncertainty Creates Real Estate Value
When we discussed the monocentric city model, we described the value of real estate in terms of rents rather than prices. While rent levels are directly related to […]
Monocentric City Model
The monocentric city model, despite its simplicity, provides fascinating insights into how cities form and what factors influence real estate prices, such as location, spatial growth, population growth, […]
Residual Theory of Land Value
The demand for construction land is derived demand, not direct demand. Land serves as a production factor—it is not needed for final consumption but rather for hosting buildings […]