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| Real Estate |
What is Real Estate?
The three important factors that affect the analysis the most are cash flows, term, and appreciation. If the relative cash flows are basically the same, then the other two factors affect the analysis the most. The longer you hold the house, the less appreciation you need to beat renting. This relationship always holds, however, the scale changes. For shorter holding periods you also face a risk of market downturn. If there is a substantial risk of a market downturn you shouldn't buy a house unless you are willing to hold the house for a long period. If you have a nice cheap rent controlled apartment, then you should probably not buy. There are other variables that affect the analysis, for example, the inflation rate. If the inflation rate increases, the rental scenario tends to get much worse, while the ownership scenario tends to look better.
A Real Estate Investment Trust (REIT) is a company that invests its assets in real estate holdings. You get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the REIT owns. Thus, you get many of the same benefits of being a landlord without too many of the hassles. You also have a much more liquid investment than you do when directly investing in real estate. The downsides are that you have no control over when the company will sell its holdings or how it will manage them, like you would have if you owned an apartment building on your own. Essentially, REITs are the same as stocks, only the business they are engaged in is different than what is commonly referred to as "stocks" by most folks. Common stocks are ownership shares generally in manufacturing or service businesses. REITs shares on the other hand are the same, just engaged in the holding of an asset for rental, rather than producing a manufactured product. In both cases, though, the shareholder is paid what is left over after business expenses, interest/principal, and preferred shareholders' dividends are paid. Common stockholders are always last in line, and their earnings are highly variable because of this. Also, because their returns are so unpredictable, common shareholders demand a higher expected rate of return than lenders (bondholders). This is why equity financing is the highest-cost form of financing for any corporation, whether the corporation be a REIT or mfg firm.
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