Financial Management

Posts Tagged ‘Real estate’

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.

Typical sources of investment properties include:

* Market listings (through a Multiple Listing Service or Commercial Information Exchange)
* Real estate agents
* Wholesalers (such as bank real estate owned departments and public agencies)
* Public auction (foreclosure sales, estate sales, etc.)
* Private sales

Once an investment property has been located, and preliminary due diligence (investigation and verification of the condition and status of the property) completed, the investor will have to negotiate a sale price and sale terms with the seller, then execute a contract for sale. Most investors employ real estate agents and real estate attorneys to assist with the acquisition process, as it can be quite complex and improperly executed transactions can be very costly. During the acquisition of a property, an investor will typically make a formal offer to buy including payment of “earnest money” to the seller at the start of negotiation to reserve the investor’s rights to complete the transaction if price and terms can be satisfactorily negotiated. This earnest money may or may not be refundable, and is considered to be a signal of the seriousness of the investor to purchase. The terms of the offer will also usually include a number of contingencies which allow the investor time to complete due diligence and obtain financing among other requirements prior to final purchase. Within the contingency period, the investor usually has the right to rescind the offer with no penalty and obtain a refund of earnest money deposits. Once contingencies have expired, rescinding the offer will usually require forfeit of earnest money deposits and may involve other penalties as well.

Real estate investing involves the purchase, ownership, management, rental and / or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is Generally Considered to be a sub-specialty of real estate investing Called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investors, real estate Becomes a risky investment. The primary cause of investment failure for real estate Is that the investor goes into negative cash flow for a period of time That is not sustainable, forcing Often Them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is Often associated with short-term profit with less effort.
Sources and acquisition of investment property

Real estate markets in most countries are not as organized or efficient as markets for other, more liquid investment instruments. Individual properties are unique to themselves and not directly interchangeable, the which presents a major challenge to an investor seeking to evaluate prices and investment opportunities. For this reason, locating properties in the which to invest can involve substantial work and Competition Among investors to purchase individual properties may be highly variable Depending on knowledge of availability. Information asymmetries are commonplace in real estate markets. This increases transactional risk, but also provides many opportunities for investors to Obtain properties at bargain prices. Real estate investors typically use a variety of appraisal techniques to determine the value of the properties prior to purchase.

Understanding Investments

Investing is all about getting the most out of the capital invested by lending to others. These investments take many forms such as bonds, stocks, mutual funds, real estate and so on. While the investment, it is very important to know the investment options and duration, as can directly affect yield and capital growth.

Two important investment strategy is often talked about as a long term investment and short-term investments, and by comparing the advantages and disadvantages of these investments, one could decide which investments best suit their financial needs.

Investments held for less than one year referred to as short-term investments, and they are appointed for short periods of time hoping for significant results. On the other hand, long-term investments are investments that are held for a longer duration, more than a year. They are intended to slow but steady increase in results over a certain period of time during the year.

The advantage of short-term investments are long term is less than a few weeks to several months, with potential for rapid growth. In addition, the money did not come out of the ownership for a longer duration, and by observing the fluctuating markets, investors can control their money easily without incurring great losses.

Given this dynamic, given that the business center industry is an impressive machine consumption, the sector increasingly needs to adapt to changes and trends in the world. Therefore, the panel guests commented that the shopping centers are transformed into different formats, ranging from an urban mall for a specific community, to the new trend, such as mixed use. Among its distinguishing features, we have the architectural design. For industry-added commercial real estate panel guests-care issues of the environment has evolved rapidly in society, to the extent that many developers, in conjunction with architects, have designed new designs in malls, which of course, are planned for the care of the environment by incorporating them, the most modern design techniques and green building. Consider that before such practices were considered a luxury, today is a reality and a fairly serious, to be applied to all new designs, write the guests.

Mexico’s architectural tradition undoubtedly favors, practices and building designs that are environmentally friendly, ie, has reduced the environmental impact in recent years. However, policies to encourage green building is relatively new and usually have focused on the housing sector. For example, the National Housing Commission – CONAVI, has been documenting sustainable practices and working to define criteria for such housing. The Institute of the National Housing Fund for Workers – INFONAVIT, has created a program of “green mortgages.” For its part, the National Commission for Energy Savings – CONAE, recently began work in implementing a program for solar water heaters, such an initiative, along with establishing sustainability guidelines for acquisitions, leases and services public sector undoubtedly contribute to the process.
In addition, new hotels in some environmentally sensitive areas are integrating technology to reduce their carbon footprint and several private companies design their offices so that they are more efficient from the point of view.
However, by themselves, market forces and existing government programs do not promote the necessary changes in the construction sector.
In fact, the business center industry, is the most important real estate market, especially because it has been used in a good way and responsibly, land and rent of commercial space, ie Retail.
Panelists say that unfortunately in Mexico there are additional obstacles, such as lack of urban planning and building regulations that address issues of sustainability, the absence of a certification system for widespread use of green building practices and lack of data on energy and water consumption in buildings.

Across the planet has been emphasizing an urgent need for global action to curb climate change, in fact, we know that unless we take immediate action to limit emissions of greenhouse gases, global warming could have irreversible consequences .
Each year, the energy consumed by buildings in North America, resulting in the release into the atmosphere of more than two thousand 200 megatonnes of carbon dioxide (CO2), that is, about 35% of the region. In this panel discussion that we had the opportunity to perform together, Immobiliare Magazine with the International Council of Shopping Centers in New York City, met several players from the real estate industry, especially the commercial sector, who from their knowledge and experience , felt about the new trends in sustainability applied to real estate development of shopping centers.
At present, there is debate in the United States, including Canada and Europe, which is the standard in sustainability, ie what is and is not sustainable. For the real estate industry for shopping centers, the discussion has huge implications, in fact, the LEED pattern has been joined by other trends such as: IE, Energy Star, among others.
Moreover, another issue is directly related the effect of Cap and Trade system, which necessarily demand accounting carbon footprint, ie, it is very important possibility for real estate development industry, the ability to sell bonds coal, however, much of the discussion and participation from real estate developers in Mexico have focused only on what to do to build a sustainable adminisde, materials, investment returns, costs, etc. However, the argument goes further. The opinion of the panelists, is not yet delved into the bond purchase programs or so-called “Carbon Credits Market.”