joellewis/real-assets

Real Assets

Core Concepts

Property Income and Return Metrics

• NOI (Net Operating Income): effective gross rental income (after vacancy) minus operating expenses; excludes debt service, capex, and depreciation.
• Cap rate: NOI divided by property value — the unlevered property yield; lower cap rates mean higher valuations.
• Income-approach value: NOI divided by the prevailing cap rate for comparable properties.
• Cash-on-cash return: annual pre-tax cash flow (NOI minus debt service) divided by total cash invested — the levered equity yield.
• GRM (Gross Rent Multiplier): price divided by gross annual rent; a quick screen that ignores expenses, vacancy, and financing.

REITs and REIT Metrics

REITs must distribute 90%+ of taxable income as dividends and trade on exchanges like equities. Sectors include residential, office, retail, industrial, data center, healthcare, self-storage, and specialty.

• FFO (Funds From Operations): net income plus depreciation minus gains on property sales — the standard REIT earnings measure, since real estate depreciation overstates actual value decline.
• AFFO (Adjusted FFO): FFO minus maintenance capex and straight-line rent adjustments — the conservative measure of recurring distributable cash flow.
• P/FFO and P/AFFO: the REIT equivalents of P/E; compare within the same sector.
• NAV premium/discount: share price relative to per-share net asset value of the underlying properties; indicates market sentiment.

Infrastructure Investments

Infrastructure assets include toll roads, utilities, pipelines, cell towers, airports, and ports. Characteristics: 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.

Leverage in Real Estate

• LTV (Loan-to-Value): mortgage amount / property value. Higher LTV means more leverage and more risk. Typical commercial LTV is 60-75%.
• DSCR (Debt Service Coverage Ratio): NOI / annual debt service. Lenders typically require 1.20x-1.50x minimum. Higher DSCR means more cushion to service debt.

Direct Real Estate vs REITs: Decision Checklist

Work through these factors before recommending a vehicle:

| Factor | Direct ownership | REITs | |--------|------------------|-------| | Liquidity | Sales take months; high transaction costs | Trade intraday on exchanges | | Management | Active management required, or pay a property manager | Passive; professional management included | | Leverage access | Non-recourse mortgage leverage at attractive LTVs (60-75%), chosen by the investor | Entity-level leverage set by REIT management; investors cannot choose property-level leverage | | 1031 exchange | Eligible — defer capital gains by exchanging into like-kind property | Not eligible — REIT shares do not qualify | | Diversification | Concentrated in one or a few properties | A REIT fund spreads across hundreds of properties and multiple sectors | | Minimum check size | Typically $50K+ equity (down payment plus closing costs) | From one share |

Mapping investor situations to the preferred vehicle:

| Investor situation | Preferred vehicle | |--------------------|-------------------| | May need the money within months, or rebalances regularly | REITs | | Wants control over leverage, tenants, and improvements | Direct | | Holds appreciated property and wants tax-deferred reinvestment | Direct (1031 exchange) | | Allocation under ~$50K, or wants broad diversification immediately | REITs | | Willing to manage tenants and repairs (or pay a manager from rent) | Direct | | Wants passive, hands-off exposure with no operational involvement | REITs |

Key Formulas

| 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 |

Worked Examples

Example 1: Property Valuation Using Cap Rate

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.

Example 2: Cash-on-Cash Return with Leverage

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).

Common Pitfalls

• Confusing cap rate with total return — cap rate ignores appreciation, leverage effects, and capital expenditures
• Using P/E instead of P/FFO for REITs — depreciation distorts net income, making P/E misleading for real estate companies
• Ignoring vacancy rates in NOI calculation — always use effective gross income (after vacancy allowance), not gross potential rent
• Overstating returns by ignoring maintenance capex — use AFFO rather than FFO for a realistic view of distributable cash flow

Cross-References

• time-value-of-money (core plugin, Layer 0): discounted cash flow analysis of property investments
• equities (wealth-management plugin, Layer 2): REIT stock analysis and equity market context
• fixed-income-structured (wealth-management plugin, Layer 2): MBS and the mortgage market underlying real estate
• asset-allocation (wealth-management plugin, Layer 3): real assets as a portfolio diversifier and inflation hedge

Running the script

uv run scripts/real_assets.py

The PEP 723 header resolves the numpy dependency automatically. Alternatively run python3 scripts/real_assets.py after pip install numpy.

• Bare run prints a demo covering property valuation, cash-on-cash and leverage analysis, REIT metrics, and inflation-adjusted returns.
• --verify re-runs the demo computations and asserts the outputs match this skill's worked examples (prints PASS/FAIL, nonzero exit on mismatch).
• --help lists the available classes.

The file is primarily meant to be imported as a module, e.g. from real_assets import PropertyValuation, LeverageMetrics, REITMetrics, RealReturn.