The Complete Guide To Real Estate Finance For Investing Properties was a great teaching book, but it was very technical. An investor must have clearly defined goals. The goals he/she establishes will directly impact their financial strategies.
Three primary financing elements around which all real estate investment activity centers are Time, Volume, and the Type of property. The element of time refers to the duration of the holding period. The element of Volume is the second significant factor that involves investment activity. The type of property an investor purchases is the third primary element that affects an investor’s strategy. property types that produce income are most commonly classified as single-family, multi-family, or commercial. The three elements of time, volume, and property type must all be considered collectively rather than individually.
The three secondary financing elements are the cost of funds, amortization period, and amount of funds borrowed.
the cost to borrow funds is expressed in terms of an interest rate. the interest rate paid on borrowed money represents the cost of funds. the amortization period refers to the length of time used to calculate loan payments if the loan were fully amortized, or repaid, over the stated loan period. the amount of funds borrowed, or loan amount, is the amount of money being borrowed to finance an investment. According to the other people’s money principle which deals with the concept of leverage the greater the percentage of money borrowed the greater the return on equity will be.
Three additional elements have an effect on real estate financing: loan duration, lender fees, and prepayment penalties.
Loan duration refers to the loan’s life or term. Loan fees come in all shapes and sizes and in all kinds of disguises. they are masked by using terms such as application fees, review fees, underwriting fees, loan origination fees, mortgage brokers fees, and points charged at closing. Many financial institutions charge their customers a substantial fee for repaying a loan prematurely.
The structural elements for financing properties are leverage, debt, equity, partnerships, blended financing, and the weighted average cost of capital and options.
The 10 essential performance measurements. One primary method of measuring relationships that exist between the variables of an investment’s income components is through the use of ratios. The use of ratios for analyzing income-producing properties is essential to properly and fully understand their restrictive values.
Net income return on investment- Cash return on investment- Total return on investment- Net operating income- Capitalization rate- Operating efficiency ratio- Gross rent multiplier- Operating ratio and Break-even ratio. these 10 are different equations to help a person look at the value of the property they are getting in from different perspectives.
There are 3 primary appraisal methods. The replacement cost or cost approach as it is commonly known. the income capitalization method, and the capital good. there are 3 common financial statements most useful for income-producing properties. the income statement, the balance statement( balance sheet), and the cash flow statement.
All of these thing helps in determining a potentially good investment from a bad one. I learned a lot from this book now I have the formulas that banks and other institutions use in determining loans. also, I can tell if a property is over or undervalued.
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