There are various financing options for the type of business I want to open and operate which is a Real Estate Investment company. Structuring these financing instruments accordingly is important and relevant to the overall success of the potential income-producing real estate investments. Moreover, selecting the right financing option depends upon the factors involved on each deal or transaction such as the time horizon, the volume of transactions and the type of property being purchased. All of these factors play a big role in selecting the right financial instrument. (Berges, 2004) There are three financing instruments I could probably use depending on what I think would be the right choice for the company’s unique objectives and …show more content…
(Berges, 2004) “You should have a minimum of a 1.1 to 1.2 ratio of free cash flow left over after all expenses have been paid to ensure that you can adequately meet the debt requirements.” (Berges, 2004, p. 66) The advantages of using debt as the financing tool to acquire real estate investments are that the loan can be obtained easily and at a lower cost than other financing tools; however, investors must analyze expected cash flow ratios to make sure they meet minimum desired positive cash flow expectations. (Berges, 2004) Finally, “the interest portion of the payment is tax deductible, because interest is treated as an expense for tax purposes.” (Berges, 2004, p. 67) Equity is another form of raising money to acquire real estate investment properties by forming a partnership or a corporation. Equity financing occurs when money instead of being borrowed is raised and invested. “Family, friends, business associates, and private investors can all be good sources of equity financing” (Berges, 2004, p. 67) The disadvantages of the equity tool for the financing of real estate ventures consist on forming partnerships or corporations; this means that institutional investors are willing to fund the venture in the form of equity, therefore, becoming shareholders (lost of control). This tool becomes attractive when small private investors
John DeRight & Judy DeRight both members of the long standing DeRight family based in Arlington, Virginia are looking to diversify their portfolio of investments and are contemplating investing in real estate to achieve their investment goal. Both are in a different stages of their life and are considering one of the four real
Angus Cartwright III, an investment advisor, was asked to provide investment advisory services for two clients, John DeRight and Judy DeRight. They both wanted to purchase a property that (1) is large enough to attract the interest of a professional real estate management company and (2) has a minimum leveraged return on their investments of 12% after
A logical place to begin the analysis is with the appropriateness of the acquisition price. Are the asset values sufficient to support the loan? Is the buyer overpaying?
Real Estate has been a driving force in world economies since the days of Babylon, one of the most fantastic developments the world has ever known, and the desire to create, not destroy, is alive and well. As the world grows more populous and available land diminishes, the opportunities that real estate development has to offer are vast and obtainable. As we descend from the booming 90s and find ourselves burdened with the realities of our own self-inflicted economic implosion caused by greed and speculation, many investors find solace in the tangible world of real estate. Moreover, the destructive effects of September the 11th are still disgorged down through our economy, which is causing an ever-increasing desire for a more concrete wealth-building option not offered by many paper investments. Many investors are still coping with the fall of such giants as Enron and world to come, while others are looking for the stability that the real estate market offers, and when you add all these ingredients to the grossly over-priced US stock market, one find a more appealing meal in the fascinating world of real estate.
There are two basic ways of financing for a business: Debt financing and equity financing. Debt financing is defined as 'borrowing money that is to be repaid over a period of time, usually with interest" (Financing Basics, 1). The lender does not gain any ownership in the business that is borrowing. Equity financing is described as "an exchange of money for a share of business ownership" (Financing Basics, 1). This form of financing allows the business to obtain funds without having to repay a specific amount of money at any particular time. There are also a few different instruments that could be defined as either debt or equity. One such instrument is stock options that an employee can exercise after so many years with the
As a fund manager for a £500m UK balanced property fund who’s direct property splits currently reflects market weighting with an average lot size of £20m. I have been asked to add an additional £50m to industrial property in London and/or office property in the Northern English provincial cities. I am required to outline and explore the factors that ought to be considered in the decision to purchase properties, the preferred sector for investment and the risks involved both from a fund and an individual property point of view. Firstly I will be talking about the market analysis of both sectors in there own provisional area, I will then go onto describe both sectors and the risks that follow them. After I will proceed to describe what sector I believe to investment, the amount in that sector and conclude the reasons for my decision.
They excel in their advertising as they advertise their services on social media and local newspapers as well as through flyers and posters. These real estates are also on large online sites; The Domain and realestate.com which are one of Australia’s leading multi-platform property industry destination. Furthermore, these big real estates have outstanding technological skills and are very up to date with the newest technological advancements which contribute to the expansion of their business to a wider audience. Additionally, these real estates are franchises which allow them to gain a wider audience because these franchises already have a set of loyal customers which can act as advertisers to expand the business. Due to the fact that these big franchises value advertising, a large portion of their income is used for advertising and royalty. Consequently, these franchises will have to increase how much they charge customers. The higher property management fee may deter customers from using their services and go to a non franchise real estate for a cheaper property management fee. A possible weakness to these big real estates is due to the fact that they’re a franchise. This restricts them from being creative and unique because they must comply to franchise
Property rights in long-term assets are generally acquired through purchases funded by either internal resources or funds borrowed form external sources. Nevertheless, a time line of the business and accounting issues are associated with the purchase of long-term assets. And these accounting issues include, in addition to the difficult financial decision, the valuation of the original acquisition cost, determining the amount of expense or periodic write-off, treatment of subsequent expenditures, and recording the disposal of the assets (Stice & Stice, 2014) , and have led to leasing as an alternative means to acquire long-term assets to be used by firms.
‘Modelling the Value-Adding Attributes of Real Estate to the Wealth Maximization of the Firm.’ This paper was authored by Anna-Liisa Lindholm (Helsinki University of Technology, Finland), Karen M. Gibler (Georgia State University, Atlanta, GA) and Kari I. Leväinen (Helsinki University of Technology, Finland). It was published in December, 2009 in the Journal of Real Estate Society Vol. 28 by the American Publisher.
One of the downsides of indirect investment is that as a minority shareholder the firm would lack certain control rights regarding management of the underlying assets. Furthermore, a number of the major listed property companies were involved in non-property investments and in sectors as Hotels. Since LL is
The study has a number of lessons learnt; first it helps firms to learn of new ways, which can be used to improve the real estate business. It provides correlation between the stakeholders in the real estate and improvement of total quality process of this service. It as well helps the real estate stakeholders to know where focus should be put by the various stakeholders to ensure that real estate terms and services are improved to enhance better quality of service. (WOLF,
The predominant way of financing is through landowner and developer self-finance, e.g., by selling part of the land parcel or other land and subscribing the housing development fully before construction starts. Buyers of individual units in multifamily apartments have to put down a 25 or more percent advance and the unit has to be paid for in a few large installments before the house is completed. This type of financing arrangement is difficult for all but the highest income groups in the absence of mortgage financing.
Throughout the 21st century, there has been substantial growth in the range of investment products designed specifically to cater an increasing high net worth population worldwide. Investment products are categorised into two distinct classes: direct investment and indirect investment, (McKeown, Kerry & Olynyk, 2014, p. 142). Individuals capable of making informed decisions on the placement of funds into cash, equities, fixed interest and real estate based products without the assistance of professional advice are referred to as direct investors, (McKeown, Kerry & Olynyk, 2014, p. 142). Conversely, the negotiation and placement of funds in a single entity, such as a property unit trust, and observing growth under the supervision of an accredited finance professional is referred to as an indirect investment, (McKeown, Kerry & Olynyk, 2014, p. 142).
Since this equity capital is usually small, it is prudent for him to decide on a mixture of equity and debt capital which will not only guarantee the highest expected return but also not impair the viability of the development. A developer’s