Slide MGT312 Slide12

Real Estate and High-Risk
Investments
Chapter 16

Real Estate
• It consists of land, all structures
permanently attached to the land, and
accompanying rights and privileges, such
as crops and mineral rights.
• Direct ownership occurs when an investor
holds actual legal title to the property.

Current Gain

Capital Gain
• Price appreciation leads to capital gains.
• Capital gains = sale price – (purchase
price + capital improvement.
• Repair expenses are not included in the
calculation above.
• Leverage can increase capital gain.

Beneficial Tax Treatments
• Depreciation is tax deductible.
• Interest is tax deductible.
• Tax-free exchanges.
• Capital gains are taxed at reduced rates.
• Rental income tax regulations on vacation
homes.

Pricing Real Estate
• Discounted cash-flow method can be used
to price real estate.
• The method discounts after-tax cash flow
at the required return.
• All discounted cash flows are summed to
achieve the correct price for the asset.