Finance
A Minnesota investor is evaluating a residential rental property. They calculate the cash-on-cash return is only 3%, while a certificate of deposit (CD) pays 4%. This comparison suggests:
AThe real estate investment is clearly superior since it provides appreciation
BThe real estate investment may not be justified based on yield alone, though appreciation and tax benefits should also be considered✓ Correct
CCDs and real estate cannot be compared since they are different asset classes
DThe investor should immediately sell the property
Explanation
A 3% cash-on-cash return compared to a 4% risk-free CD return suggests the real estate investment may not be justified on yield alone. However, real estate offers potential appreciation, tax benefits (depreciation deductions), and inflation hedging that CDs do not provide. Minnesota investors must evaluate all components of real estate returns, not just current cash flow.
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