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

• Main Authors: KOH, Winston T. H., NG, Edward H. K.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2004
• Subjects: mortgage financing; real estate; financial leverage; optimal holding period; Finance; Real Estate
• Online Access: https://ink.library.smu.edu.sg/soe_research/438; https://ink.library.smu.edu.sg/context/soe_research/article/1437/viewcontent/71_97.pdf
• Institution: Singapore Management University

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 to compare the required rate of return with the leveraged rate of return on equity.