For a given real estate investment, if the cost of funds is 6% and the return on assets (ROA) is 4%, What would be the downside to make a decision to finance in terms of cash flow? What problems will the investor face with cash flow?

For a given real estate investment, if the cost of funds is 6% and the return on assets (ROA) is 4%, What would be the downside to make a decision to finance in terms of cash flow? What problems will the investor face with cash flow?

 

 

answer:

In the given problem, if the investor invest in a real estate,

The cost of funds = 6%, and

The return on assets (ROA) = 4%

By the investment in real estate in the given case, the investor should spend 2% more than the return.

  • If we take into consideration the cash flow it is very low than other types of investment why because it is not sufficient to meet the total cost of funds (6%) moreover the investor has to spend more than that what they have received i.e., return on assets (ROA) 4%.

But investment in real estate will give benefits in the form of

The major advantage in investing real estate is if the investor find a property at a very low price it would give him a reasonable profit when the market is high.

The investor can also invest in real estate and generate immediate return by renting out the property. After some time the rent could be increased or if the investors are in need big money he can sell the place anytime and can get the money.

It is always a secured investment in order to take care of their family, even better than keeping an insure policy because it can always generate cash flows.

If the property is easily convertible to rental units, the owner of the property can earn a steady income stream in the form of rent.

Owning property can offer the investor a sense of security because the value does not tend to fluctuate as much as other assets such as stocks and bonds.

Another reason why many investors are attracted to investing in real estate is because the property can be utilized by the investor.

  • In terms of cash flow the investor may face problems in the following situations:

The cost of maintaining the property can cause the investor to lose money on the investment. In larger cities, property taxes can be so high that it will be very difficult to resell the property at a higher value. If they are not getting reasonable cash flow it becomes difficult to maintain it.

Before investing in real estate, the investor should always factor property taxes into their valuation of the property.

This investment needs a huge amount of investment and needs to be taken care of as he once owns the property. It is sometimes costly to manage the re-selling and operation of their property.

Real estate requires day-to-day maintenance and management, at both operational and at selling strategy level. It requires a lot of time and resources.

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