Real Estate
Investment in physical property for rental income and capital appreciation, accessed directly or through REITs.
Item-writers love the income approach: you’ll get NOI and a cap rate and must back out value, or be handed comps to derive the cap rate first. The classic tell is a question that starts from potential gross income and forces you to subtract a vacancy and collection loss (giving effective gross income) plus operating expenses to reach NOI — candidates who capitalize gross rent instead of NOI overstate value. Remember NOI sits before financing and income taxes, so mortgage interest and depreciation never enter it; direct capitalization also assumes a stabilized, perpetual NOI, unlike a full DCF.
The sharper trap is mixing up the alternatives. Commodities generate no income, earning returns from spot moves, roll yield, and collateral yield; infrastructure delivers contractual, often regulated cash flows with bond-like, defensive profiles. Real estate sits between — but its appraisal-based valuations smooth reported returns, biasing measured volatility and cross-asset correlation downward and overstating diversification. And don’t assume that benefit survives a crisis, when correlations across assets tend to spike.
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