Financing Structure Essay

1031 Words5 Pages
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
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