Finance Guide

The secret in real estate business is to use other people’s money. This is how most real estate tycoons are made. Unlike traditional residential real estate mortgages, real estate financing offers much broader financial options, including lending or financing from various financial institutions. Transactions like these call for above-average negotiation skills.

It’s not advisable to invest your own money in a real estate as for a few very important reasons. First, you you tend to give most of your profits away by not leveraging your investment. Second, real estate is a very risky business – you don’t want to jeopardize everything you have.

This is not to say that real estate investment is all about losses. On the contrary. if you know how to make money work for you, you may actually garner a great deal of money in return for your investment.

Here’s how:

If, for example, you purchase a $100,000 property that increases an average of 7 percent per year (in reality that number could be higher or lower), you would see a net profit from renting your property resulting in an approximately 15 percent return.

If you’re content with little return of investment, you might settle with your 15 percent return. But if you really want to earn on your investment, consider the possibility of what leveraging can do for you. At present, a typical real estate investor can find financing as high as 95 to 97 percent of the purchase price. There even some instances where you may be able to get a 100 percent financing but we won’t use this for our example as it’s an inadequate comparison.

So, if you’re are an investor who is already content with a smallreturn of investment then 15 percent sounds like a lot. But for those who really want to make it big in the real estate, 15 percent is far from being considered a noteworthy return.

How does leveraging work?

Let’s assume that the rental income will cover all your expenses, including the mortgage payments. Taking the same example, a 7 percent appreciation of your property results in a $7,000 profit per year. With a 95% financing in place, you’ll be able to get a $7,000 return on $5,000 (your 5 percent down payment on a $100,000 real estate property). This will provide you with a 140 percent return on your investment. Not only that, with the same $100,000 you can go out and purchase 20 investment properties, finance 95% percent of them, and make an amazing $140,000 profit a year. This totally beats the $15,000 profit with an all-cash transaction.

In terms of the additional 20 properties, expect to have a hard time getting financing for them since usually only five or six new rental property mortgages are the maximum that lenders presently allow. Which is why you need to have an above-average negotiation skills.

Daily headlines in UK media are reminding us of falling property sales and falling property prices due to credit restrictions by the lending banks. The latest report out this week confirms that the number of mortgages granted in May this year is down to a third of what it was in May 2007!

In sharp contrast, the situation for purchasers in France appears to be very different for purchasers of leaseback properties.

An example is BNP Paribas bank which is offering purchasers at Chateau de Camiole 80% mortgages (subject to status). The 80% is based on the total price including the property, furniture and 19.6% purchase tax. As the properties are for sale on the French leaseback system, purchasers are allowed to deduct the purchase tax, which is paid by the developer and then reclaimed from the French Government, so in effect the loan is for 100% of the property value with the additional benefits that the properties are fully furnished!

Purchasers of Chateau de Camiole property are asked to pay the initial 5% reservation deposit from their own funds, but this can be reclaimed later once the mortgage is approved and the bank funds have been received.

Chateau de Camiole Apartment purchasers also receive a guaranteed income up to 4.10% without personal use and reduced income if they wish to use the properties up to 12 weeks per year with minimal running costs of €5 per m2 and the annual Tax Fonciere (€300 – €500). Villa purchasers, apart from the guaranteed income options, can choose a residential option with the facility to use the property up to 150 days per annum and sharing the rental income 50/50 with the developer.

The initial leaseback term is for 11.1/2 years and the developer is insured so the guaranteed income is protected.

Property prices are expected to increase on average 5% in France in 2008 which makes a purchase at Chateau de Camiole an even more attractive proposition!

We humans are as creative on the “Dark Side” of commercial activity as we are in developing beneficial new products and services. In the face of huge financial benefits, however, some corporate executives can’t resist taking an extra dessert even before their shareholders have finished dinner. Some scandals have more of an impact on investors than others, and most produce unwarranted layers of government regulation and control that stifle honest creativity.

Plain vanilla fraud and theft are less worrisome to me than situations where the general acceptance of misinformation or “business as usual” practices allows inherently bad product ideas and blatant mismanagement to become accepted by regulatory authorities, financial professionals, and myopically gullible consumers. Here are some candidates for future “Blockbuster Scandal Awards” (B S Awards, if you will): Variable Life Insurance & Annuities, Wrap Fee Managed Investment Accounts, Portfolio Window Dressing, Asset Allocation Mutual Funds, and Obscene Executive Compensation.

1) Variable Insurance and Annuities: Variable products are a relatively new thing in the insurance industry, circa 1980 or so. Before that, the conventional wisdom labeled the Shock Market much too risky for Life Insurance Policy and Annuity Contract guaranteed benefits. In fact, these benefits had been “guaranteed” for so long that it became a generic expectation of anyone in the market for either. So why did the State Insurance departments cave in to the Variable Product lobby? And what is not emphasized as these products are marketed to potential insureds and annuitants?

As if the 8% sales commission on Straight Life Annuities wasn’t enough, the addition of Mutual Fund bonuses made the Variable Annuity irresistible… to financial professionals. Similarly, this product is so lucrative for the companies that they manipulate their rates to become more competitive. Since the introduction of variable benefits, there have been more insurance company failures and scandals, and not just a few disappointed recipients of reduced annuity payments. What’s in your retirement plan?

2) Wrap Fee Investment Accounts: From the very beginnings of wealth, the very wealthy employed Investment Managers to protect and to grow their portfolios. Most Investment Managers had just a few huge clients that they tended to while the rest of the fledging financial industry focused on property protection and estate creation through life insurance. Most of today’s (salaried) Investment Managers are employed by Financial Institutions to supervise thousands of Mutual Funds for millions of investors of all financial shapes and sizes. There are more Equity Mutual Funds than there are individual Equities on the New York Stock Exchange. Most investors today will employ many Investment Managers and never actually speak to any of them.

Enter the personally managed investment portfolio product offered by most major Financial Institutions. For a single fee, you receive the personal services of a professional Investment Manager, and a portfolio specifically designed for you. Except, of course, that you get neither. You get precisely the same portfolio as everybody else, and all at once regardless of price… a Mutual Fund with individual statements. But of course, you can speak to the manager any time you like, change your asset allocation, set aside a reserve for an upcoming expenditure, etc. Yeah, sure you can!

Note that “Flat Fee” managed accounts are quite different and may actually be separately and personally managed.

3) Portfolio Window Dressing: Every quarter, every year, we hear about the adjustments that portfolio managers are making as they attempt to look smart to their largest clients. Now in a discipline (Investing) that they all officially recognize as a long-term commitment to some specific strategy or plan, why do the Masters of the Universe spend so much time manipulating their short-term performance numbers? And why is this considered business as usual instead of common fraud?

4) Asset Allocation Mutual Funds: I look at Asset Allocation a bit differently than most professionals seem to and I regulate and monitor a portfolio’s structure using the cost basis of securities rather than their Market Value. But how, logically, can a one-size-fits-all Mutual Fund be the right mix for all investors? Here’s a definition found on the Internet: “A mutual fund that rotates among stocks, bonds, and money market securities to maximize return on investment and minimize risk”. And a definition of Asset Allocation from a similar source: “The practice of distributing a certain percentage of a portfolio between different types of investment assets, such as stocks, bonds, mutual funds, cash, real estate, options, etc. By diversifying an individual’s asset base, one hopes to create a favorable risk/reward ratio for a portfolio”.

In reality, Asset Allocation is a structure-planning tool that determines what percentage of an Investment Portfolio is to be invested for Growth in Equity securities and what percentage is to be invested for income production. The proper allocation is a function of the investor’s age, marital status, financial position, employment status, retirement plans, expenditure needs, risk tolerance, family responsibilities, etc. Diversification occurs within the two (just two) asset classes. One size fits all… who’s kidding whom?

5) Corporate Executive Compensation: I strongly believe that everyone has the right to become filthy rich, legally of course. I respect anyone who gets there honestly because their success creates jobs, opportunities, wealth, and a higher standard of living for everyone. But, once they sell shares of their successful enterprises to the public, they have a responsibility to share future profits and growth. Obscene executive suite compensation (right down to the chauffeured limousines) is simply stealing from shareholders.

With every new Scandal, a voracious Media and a hypocritical Congress exacerbate the fear of shocked investors and call for more regulation of the very entities whose success, freedom, viability, and competitiveness they should be nurturing. Ironically, politicians are always the most outspoken critics… probably because of their familiarity with cover-ups and improprieties. But no one ever questions the integrity of the Financial Institutions that invent, produce, price, and promote products and services that do far more long-term harm than the few (albeit serious and sensational) incidents of corporate wrong doing.

Four of the five candidates for this year’s Blockbuster Scandal (B S) Award were created on Wall Street. The fifth is ignored by it. Which one bothers you most?

You may have decided you would like to start investing in property but you are not exactly sure how to go about it. One thing you should do before you begin is to research the financing options that may be available to you.

Most people, when they first begin their endeavor with property investing, find that financing is their only means of purchasing property. The following is some information regarding real estate financing and investment strategy that may be beneficial to you.

When you hear the term “leverage” applied to real estate financing and investment, you will find that this term simply means to use borrowed money for financing your property investment. Your initial investment will be the money that you use for a down payment.

In order for this leverage to be beneficial in your real estate finance and investment strategy, you will want to secure the borrowed money at a low-interest rate and make sure the term of the loan is over the longest period of time that is possible. This is to avoid yourself from being tied up in the property and having least money for your own or other investment usage.

You do have to remember, however, that the risk of your investment is tied in directly with leverage. If you place a small down payment on the property, the leverage is high and the ratio of the amount owed to the value of the property is high, making the property a high risk. The more money you put as a down payment on the property, the lower the leverage and the lower the risk.

Many, in their real estate financing and investment strategy, use pyramiding to acquire more properties. What this simply means is that you are using the equity on one property to help you purchase another.

For example, you purchase a property for $100,000 by making a down payment of $20,000 and borrowing $80,000. The properties value at the time of the purchase is $110,000. Six months later, you have a positive cash flow of $1,000 a month on the property and its value has increased by $40,000 due to your renovations. You now have equity of approximately $70,000 or more in the property.

You take out a home equity loan of $30,000 and this is used for the down payment of another investment property. This is also known as pyramiding and is a real estate finance and investment strategy used by many.

Pyramiding through sale is also another real estate finance and investment strategy used by many, as well. In this method, when your property’s value has increased, you sell instead of taking out a home equity loan.

In the example above, if the same property was sold for its value of $150,000, you would use the money to pay off the initial loan of $80,000, deduct your initial investment of $20,000, what you have paid in interest and principal, as well as the cost of renovations, to discover you’ve made a profit of approximately $25,000 to $30,000 in a matter of a six-month period. This money can then be used as a down payment on another property.

Before you begin investing in property, it is crucial to understand what real estate finance and investment strategy you plan to use. However, it is also important to understand that property investment comes with risk. Research the facts and figures before you make any decision with your real estate finance and investment strategy.

Business finance is term that means exactly what it says, finance for businesses. It deals mostly with bank loans, overdrafts, factoring, invoice discounting, leasing and investment. It is something a business takes part in to acquire and convert capital funds to meet the monetary needs of the business. The main part of the equation focuses on bank loans. Getting a loan is an integral part in keeping a business up and running. If a company has just started operation, it may be hard to secure a loan, as banks usually want to see a history of operation before giving out any money.

When applying for a loan, remember the main reason why banks will deny a business a loan is because they have determined that the business is at a high risk of not being able to repay the loan. In the world of business finance, this is known as risk assessment, something any lending institution will do before handing out a loan. A bank will need to look at many things including credit history, operation history, experience and education to decide whether a business poses little to no risk or if a business is at high risk of not paying back the loan.

Perhaps the most important factor looked at by a bank is a company’s business plan. A lender will analyse a business plan and can find out all kinds of information that will help them decide if they will give the business a loan or not. A bank needs to use good judgment when looking at a business plan, as making a wrong decision could cost the bank a lot of money if a loan is given out and not repaid. With business finance, a bank will use a business plan as well as numerous other factors to determine if a business is going to be a high risk or a low risk in terms of paying back the loan.

The business plan will show the lender many things including just how much money the business needs to borrow. It will also show how the business plans on paying back the loan, and when it should be paid off completely. In terms of business finance, the bank simply needs to make sure that the business has sound plans in place to keep its business running and operational so that it will remain profitable enough so that it can pay back the loan.