From wealth-management
Analyzes real estate and infrastructure investments including REITs, property valuation via NOI/cap rates, REIT metrics like FFO/AFFO, cash-on-cash returns, LTV/DSCR. Useful for investing queries.
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Analyze real estate and infrastructure investments including REITs, direct property, and infrastructure assets. This skill covers property valuation using NOI and cap rates, REIT-specific metrics (FFO, AFFO), leverage analysis, and the stable cash flow characteristics of infrastructure investments.
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Analyze real estate and infrastructure investments including REITs, direct property, and infrastructure assets. This skill covers property valuation using NOI and cap rates, REIT-specific metrics (FFO, AFFO), leverage analysis, and the stable cash flow characteristics of infrastructure investments.
2 — Asset Classes
both
NOI = Gross Rental Income - Operating Expenses
Operating expenses include property taxes, insurance, maintenance, management fees, and utilities (if paid by the landlord). NOI excludes debt service (mortgage payments), capital expenditures, and depreciation. NOI is the core measure of property-level income before financing and taxes.
Cap Rate = NOI / Property Value
The capitalization rate represents the unlevered yield on a property. It is the real estate equivalent of an earnings yield. Lower cap rates imply higher valuations (and vice versa). Cap rates vary by property type, location, and market conditions.
Value = NOI / Cap Rate
This is the income approach to real estate valuation. Given a property's NOI and the prevailing cap rate for comparable properties, the value is derived by dividing NOI by the cap rate.
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
This measures the return on the investor's actual equity investment, after debt service. It accounts for leverage, unlike the cap rate which is unlevered.
GRM = Property Price / Gross Annual Rental Income
A quick screening metric. Lower GRM suggests better value. Does not account for operating expenses, vacancies, or financing.
REITs must distribute 90%+ of taxable income as dividends, making them high-income vehicles. They trade on exchanges like equities, providing liquidity that direct real estate lacks. REIT sectors include residential, office, retail, industrial, data center, healthcare, self-storage, and specialty.
FFO = Net Income + Depreciation/Amortization - Gains on Property Sales
FFO adds back depreciation because real estate depreciation (a non-cash charge) often overstates the actual decline in property value. FFO is the standard earnings measure for REITs, replacing net income.
AFFO = FFO - Maintenance Capital Expenditures - Straight-Line Rent Adjustments
AFFO is a more conservative and accurate measure of a REIT's recurring cash flow available for distribution. It accounts for the capital needed to maintain properties in their current condition.
Infrastructure assets include toll roads, utilities, pipelines, cell towers, airports, and ports. Characteristics include long asset lives, high barriers to entry, regulated or contracted revenue streams, and inflation-linked cash flows (many contracts include CPI adjustments). Infrastructure provides stable, bond-like income with equity-like upside from traffic/usage growth.
| Formula | Expression | Use Case |
|---|---|---|
| NOI | Gross Rental Income - Operating Expenses | Property income measure |
| Cap Rate | NOI / Property Value | Unlevered property yield |
| Property Value | NOI / Cap Rate | Income-based valuation |
| Cash-on-Cash | Annual Cash Flow / Total Cash Invested | Levered equity return |
| GRM | Price / Gross Annual Rent | Quick screening metric |
| FFO | Net Income + Depreciation - Gains on Sales | REIT earnings measure |
| AFFO | FFO - Maintenance Capex - Straight-Line Rent Adj | Recurring cash flow |
| LTV | Loan Amount / Property Value | Leverage measure |
| DSCR | NOI / Annual Debt Service | Debt coverage measure |
Given: NOI = $100,000 per year, prevailing cap rate for comparable properties = 6% Calculate: Property value Solution: Value = NOI / Cap Rate = $100,000 / 0.06 = $1,666,667
The property is valued at approximately $1,666,667. If the cap rate compressed to 5% (e.g., in a hot market), the value would rise to $2,000,000 — a 20% increase from a 100bp cap rate decline. This illustrates the sensitivity of real estate values to cap rate changes.
Given: Property value = $500,000, down payment = $200,000 (40%), mortgage = $300,000 at 6%, NOI = $35,000, annual debt service = $17,000 Calculate: Cash-on-cash return Solution: Annual pre-tax cash flow = NOI - Debt Service = $35,000 - $17,000 = $18,000 Cash-on-Cash Return = $18,000 / $200,000 = 9.0%
Compare to the unlevered cap rate: $35,000 / $500,000 = 7.0%. Leverage boosts the equity return from 7.0% to 9.0% because the cost of debt (6%) is below the cap rate (7.0%) — this is positive leverage. If the mortgage rate exceeded the cap rate, leverage would reduce returns (negative leverage).
See scripts/real_assets.py for computational helpers.