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Investing in Real Estate: Mortgage Financing Practices and Optimal Holding Period

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  • Winston T.H. Koh

    ()
    (School of Economics and Social Sciences, Singapore Management University)

  • Edward H.K. Ng

    ()
    (National University of Singapore)

Abstract

Real estate investments are typically characterized by high degrees of leverage and long loan tenures. In perfect capital markets, leverage has no impact on the investment decision apart from tax considerations. However, the mortgage financing market is imperfect in many countries. In the presence of market imperfections, an optimal holding period exists for real property investments. We provide a simple rule to calculate the optimal holding period is to compare the required rate of return with the leveraged rate of return on equity.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 03-2005.

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Length: 29 pages
Date of creation: Feb 2005
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:03-2005

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Keywords: mortgage financing; real estate; financial leverage; optimal holding period;

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  1. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
  2. Andrew H. Chen & David C. Ling, 1989. "Optimal Mortgage Refinancing with Stochastic Interest Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(3), pages 278-299.
  3. David Genesove & Christopher J. Mayer, 1993. "Equity and time to sale in the real estate market," Working Papers 93-6, Federal Reserve Bank of Boston.
  4. Michel Glower & Donald R. Haurin & Patric H. Hendershott, 1998. "Selling Time and Selling Price: The Influence of Seller Motivation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(4), pages 719-740.
  5. William B. Brueggeman & Jeffrey D. Fisher & Jerrold J. Stern, 1981. "Federal Income Taxes, Inflation and Holding Periods for Income-Producing Property," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 9(2), pages 148-164.
  6. Patric H. Hendershott & David C. Ling, 1984. "Trading and the Tax Shelter Value of Depreciable Real Estate," NBER Working Papers 1267, National Bureau of Economic Research, Inc.
  7. Gau, George W & Wang, Ko, 1994. "The Tax-Induced Holding Periods of Real Estate Investors: Theory and Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 8(1), pages 71-85, January.
  8. Roger G. Ibbotson & Laurence B. Siegel, 1984. "Real Estate Returns: A Comparison with Other Investments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 219-242.
  9. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
  10. James R. Follain & David C. Ling, 1988. "Another Look at Tenure Choice, Inflation, and Taxes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(3), pages 207-229.
  11. David C. Ling & Michael J. Whinihan, 1985. "Valuing Depreciable Real Estate: A New Methodology," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(2), pages 181-194.
  12. George W. Gau & Ko Wang, 1990. "Capital Structure Decisions in Real Estate Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 501-521.
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