Real Estate Investments with Stochastic Cash Flows

This paper examines the ownership of real estate as a long-term, risky investment. Using stochastic calculus, the risk is analyzed by assuming that the cash flows in a property investment are growing as arithmetic Brownian motion with the possibility of becoming negative, while the value of the property is growing as a geometric Brownian motion. The analysis takes into account depreciation and taxes. The results are useful for a corporation or a long-term individual investor interested in real-estate investments. 1