Leveraging in Real Estate and knowing when to Exit

LEVERAGING IN REAL ESTATE

When the cost of borrowing money is cheap you can get a better price for your real estate because the leverage is better. Leverage is the difference between the rate of return on a “free and clear” basis and the rate of return on invested capital. For example, suppose you are buying a small office building for $10 million and the annual cash flow is $1 million. That’s a 10 percent return on a free and clear basis. Now instead of buying the property for all cash, assume you take out a mortgage of $8 million (80 percent of the purchase price) at an annual interest rate of 7 percent. The annual cost of the mortgage portion of the investment is $560,000. The annual return on your $2 million investment is $440,000 or 22 percent on your cash. That’s how fortunes are built.

EFFECT OF STOCK MARKET & INFLATION

There is usually a high demand for real estate when the stock market and the bond market show low returns. It is also true when the rate of exchange of the dollar for foreign currencies is low because foreign investors see bargains in the making. When the rate of inflation starts to rise dramatically buyers will often flock to real estate because increase in real estate prices and rents seem to rise in line with the rate of inflation. Effect of Inflation on Real Estate - Bullzbearz  

WHEN TO EXIT

If you have a piece of property in an area that is deteriorating as indicated by “for sale” or “for rent” signs or by increased boarded up or vacant stores or buildings and you have no solid information as to when this cycle will change—get out! Take a loss, if you have to, but get out! If interest rates are rising and you have a mortgage, which will be coming due shortly, sell, preferably to an investor that has lots of ready cash, but sell!

If you own a building which is going to be adversely affected by a change in traffic patterns or new interstates or highways, sell as soon as you have reason to believe that any of those items will become a reality.

If you have a building that you believe will be adversely affected by some new construction in the area, that’s also a time to sell. This is especially true if you have a property with retail stores and new, larger or serious competition is on the way.

You should consider selling real estate when you encounter obstacles to the project, such as denial of zoning or approvals and the projected critical path of your project is no longer feasible. You should also consider selling if key relationships or people you rely on drastically change or leave the picture.

Source: "Trump Strategies for Real Estate"  21 things to learn from Donald Trump Strategies - Bullzbearz