Non-financial investments

Question 1

Are real estate investors active or passive?

Answer 1

Both active and passive

Question 2

REIT

Answer 2

Real estate investment trust

Question 3

MBS

Answer 3

Mortgage backed security

Question 4

Categories of non-financial assets

Answer 4

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

Question 5

How are real assets unique to financial assets?

Answer 5

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

Question 6

Capital expenditure

Answer 6

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

Question 7

How are capital expenditures evaluated?

Answer 7

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

Question 8

What does NPV mean

Answer 8

Present value of the cash inflows minus the cash outflows

Question 9

Cash outflows

Answer 9

Down payment

Question 10

Cash inflows

Answer 10

Rent and resale

Question 11

What is the decision rule on evaluating investments?

Answer 11

NPV > 0 = accept

NPV

Question 12

What is a discount rate and what is the usual %

Answer 12

Required rate of return

8-12%

Question 13

What is IRR and the decision rule?

Answer 13

Internal rate of return
Rate that makes NPV=0

IRR > DR = accept
IRR

Question 14

IRR vs. NPV which is better?

Answer 14

NPV- tells how much cash you make

Question 15

IRR flaws

Answer 15

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

Question 16

Modified internal rate of return (MIRR)

Answer 16

• ROR where cash flows are changed to a normal pattern

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

Question 17

Profitability index (PI)

Answer 17

NPV/initial investment

-Used for comparing two properties

Question 18

Renting vs. owning a home issues

Answer 18

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