Real Estate Tools
1. Understanding the value of location
This tool shows how the change in rent when moving away from a high rent district informs an investor about the direction of the path of progress. The slope of rent decay becomes an indication of how valuable land is in any specific direction.
2. Entrepreneurial Growth
Rather than have growth occur at a constant rate over time, it is possible to model growth that is faster in early years as the entrepreneur adds labor and value to a property during the turnaround process. Following the initial spurt of entrepreneurial growth the remaining years grow in a slower, monotonic fashion.
3. Asymmetric Probability
The burden of management comes with the benefit of control. As the entrepreneur imprints his style on the property and adds value via creative skill he also modifies the probabilities. Unlike stock market investments, the site-specific risk of property ownership involves the specific owner. Talented owners shape their environment and that shaping is at the heart of risk management.
4. Risk, Variation and Tail Behavior
For centuries scientists, mathematicians, statisticians and various popular prognosticators have looked to the normal distribution and its "variance" to describe risk. Doing so inherently fails to consider activity in the tails of the distribution. Spectacular failures (Barings Bank, Long Term Capital Management and Orange County) have made headlines in recent years, events traceable to the assumption that the world is distributed normally . For the first time anywhere, mathestate provides a fast, reliable method to estimate risk consequence associated with extreme events.
5. Questioning the "efficiency" of the Frontier
An important result of Modern Portfolio Theory is that one can combine assets having different covariances in ways that either increase return while holding risk constant or that reduce risk in the face of constant return. This conclusion is based on a set of strong assumptions, one of which is that returns are distributed normally. Suppose that were not the case. What does the frontier look like when returns are non-normal stable distributed with heavy tails?
6. Market Cycles and Holding Period
Growth is a one-side view of change. "Negative" growth acknowledges that things go down as well as up. Real estate offers a sort of "cure" for short term cycles in the form of simply extending the holding period. This tool shows how managing the direction of capitalization rates over time is a key to investment success.
7. Real Estate Price Bubbles
Despite considerable hype during times of rapid price appreciation, there is a logical way to view real estate price bubbles and how investors can deal with them. Bubbles do form at times but wiith rare exceptions the bubbles do not burst, rather they stop inflating or gradually deflate.