Question

Suppose Valerie wants to invest in real estate and is considering two different residential properties. Based on the expected incomes and operating expenses of each, she estimates that the first property (property A) has an NOI of $45,000 and that the other (property B) has an NOI of $38,000.

If the cap rate is 10%, property A has an estimated value of
$
and property B has an estimated value of
$
. In deciding between these two properties, it is important for Valerie to consider other factors. If she is a first-time investor, she is probably better off investing in property. (Note: Round your answers to two decimal places.)
Alternatively, Valerie might want to consider investing in a real estate investment trust (REIT), a type of investment company that operates similarly to mutual fund. Which of the following statements regarding REITs are true? Check all that apply.

They allow individuals to buy shares in a real estate–based stock portfolio.
They pay dividends.
The value of REITs tends to move in the same direction as the general stock market.
All REITs own income-producing real estate such as office buildings and hotels.

Answer 1

They allow individuals to buy shares in a real estate–based stock portfolio. (True)

They pay dividends. (True)

The value of REITs tends to move in the same direction as the general stock market. (True)

Property A value = 45000/0.1

= 450000

Property A value = 38000/0.1

= 380000

So, property A has an estimated value of $450,000, and property B has an estimated value of $380,000.

Dividends are payments provided to shareholders by a firm, usually in the form of cash or extra shares of stock. Profitable businesses frequently give a percentage of their earnings to shareholders as a way of providing a return on their investment.

REITs all own income-producing properties such as office buildings and hotels. (False) - While many REITs possess income-producing real estate, it is not correct to suggest that all REITs own only these types of properties.