Financial Management

Posts Tagged ‘Finance’

Sources of investment capital and leverage

Real estate assets are typically very expensive in comparison to other widely-available investment instruments (such as stocks or bonds). Only rarely will real estate investors pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself. The amount of the purchase price financed by debt is referred to as leverage. The amount financed by the investor’s own capital, through cash or other asset transfers, is referred to as equity. The ratio of leverage to total appraised value (often referred to as “LTV”, or loan to value for a conventional mortgage) is one mathematical measure of the risk an investor is taking by using leverage to finance the purchase of a property. Investors usually seek to decrease their equity requirements and increase their leverage, so that their return on investment (ROI) is maximized. Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value. Investors seeking low equity requirements may explore alternate financing arrangements as part of the purchase of a property (for instance, seller financing, seller subordination, private equity sources, etc.)

Some real estate investment organizations, such as real estate investment trusts (REITs) and some pension funds, have large enough capital reserves and investment strategies to allow 100% equity in the properties they purchase. This minimizes the risk which comes from leverage, but also limits potential ROI.

By leveraging the purchase of an investment property, the required periodic payments to service the debt create an ongoing (and sometimes large) negative cash flow beginning from the time of purchase. This is sometimes referred to as the carry cost or “carry” of the investment. To be successful, real estate investors must manage their cash flows to create enough positive income from the property to at least offset the carry costs.

A residual income is basically periodic payments you receive after a first sale.
An example would be a composer or author that continues to receive royalties from the sale of a workpiece or once established vendors who continue to receive monthly fees for onetime sales. Passive income ‘income from business investments in which the individual is not actively involved. ” Examples of such income was received dividends from shares or a monthly rental property, or interest on the money sitting on the bench.
Some benefits of financial freedom.
* Having more free time.
* Quality of Life
* Do not worry about debts
* To live without financial worries
Now the financial freedom does not mean you’re a millionaire but have enough clearance to live a carefree life by coming to the end of the month. Remember that it is more rich who earn more but spend less.
One of the most important things to get your financial freedom is not sufficient merely to enable you to have discipline and attitude, she needs to know at this point I advise you out of your pocket to your head, your head will fill your pockets.
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Brian Tracy is one of my favorite motivational authors, not one of those authors who only bring us pretty words, but teaches effective strategies to achieve results in life. This book is not extensive and that condenses a lot of ideas and wisdom in a nutshell.

The book also can be found under the title: “21 Secrets to become a millionaire with his own efforts” and I recommend it especially for people who do not have a great habit of reading or an author they like to go straight to the point instead of take several turns of the same ideas.

There is a book of advanced strategies or financial planning is actually more a book of principles on which the reader will have to find some way to actively implement them in life. Read the rest of this entry »