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Real Estate Test 3 > Non-financial investments > Flashcards

Flashcards in Non-financial investments Deck (18)
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1
Q

Are real estate investors active or passive?

A

Both active and passive

2
Q

REIT

A

Real estate investment trust

3
Q

MBS

A

Mortgage backed security

4
Q

Categories of non-financial assets

A
Real assets (physical)
Human-related assets (pensions, inheritance)
Other assets (jewelry)
5
Q

How are real assets unique to financial assets?

A

Stocks and bonds are pieces of paper that rely on someone else; only relying on yourself in real estate

6
Q

Capital expenditure

A

An outlay of cash for a short-lived item (10-15 years) that provides benefits to the property
-PP&E, heat/AC, roof

7
Q

How are capital expenditures evaluated?

A

Using the CF key similar to calculation of IRR, but now look at NPV

8
Q

What does NPV mean

A

Present value of the cash inflows minus the cash outflows

9
Q

Cash outflows

A

Down payment

10
Q

Cash inflows

A

Rent and resale

11
Q

What is the decision rule on evaluating investments?

A

NPV > 0 = accept

NPV

12
Q

What is a discount rate and what is the usual %

A

Required rate of return

8-12%

13
Q

What is IRR and the decision rule?

A

Internal rate of return
Rate that makes NPV=0

IRR > DR = accept
IRR

14
Q

IRR vs. NPV which is better?

A

NPV- tells how much cash you make

15
Q

IRR flaws

A

Reinvestment rate decision flaw- more aggressive than reinvesting at your discount rate
Multiple IRR issue

16
Q

Modified internal rate of return (MIRR)

A
  • ROR where cash flows are changed to a normal pattern

- Discounting negative cash flows to PV and compounding positive cash flows to FV

17
Q

Profitability index (PI)

A

NPV/initial investment

-Used for comparing two properties

18
Q

Renting vs. owning a home issues

A
Little short term liquidity- rent
Maintenance- rent
Taxes, insurance, loans- rent
Price volatility- rent
Tax savings- own
Pride of ownership- own
Inflation- own