Real Estate Financing

March 18, 2010 | Posted by admin

     Real estate is a lucrative business line, but it does involve considerable amounts of money. When you wish to raise real estate financing, you need to know at what stage of development the project in question is. Financers are aware of the fact that the transitional phase calls for the highest amount of required funding. They will also want to know for what you will use the funds.

     The financer will want to be sure of the strength of your management team, since management is a critical element assessed by lenders. The financier will wish to see your business plan, too. This means that you will need to project your estimated project costs for at least the first several months and maybe even longer. You will need to draw up a new plan and cost estimate, since every project has its own specific funding requirements at various development stages. There is no general yardstick for start-up costs in a real estate project.

     Some projects call for only minimal funding, while others will entail huge costs in inventory or equipment. You must ensure that you have sufficient funding to see the project to completion. For a reasonable estimate of overall costs, you must include all ‘soft costs’ during the inaugural stage. These will include the fee for obtaining permits, engineering costs and infrastructure and construction costs. You must also factor in continuous expenses for utilities, inventory, insurance, etc. Eliminate all unnecessary costs and arrive at a realistic budget to complete your project.

     You can effectively calculate your start-up costs with a worksheet that mentions all possible cost categories, both one-time and ongoing. Thereafter, you must maintain regular financial statements. These provide a ready financial history of the project and help you in the timely detect anomalies that could result in heavy losses.

     As far as possible, you should try to raise real estate financing through your own resources. Thereafter, you have the options of debt and equity financing.

     Debt-based real estate financing

     In debt financing, you borrow money from a creditor in exchange for future repayment along with interest. The lender has no ownership rights on the owner’s business or business interests, including the project he is financing. Debt financing is suitable when you do not wish to surrender any ownership interests in your business. In debt financing, the financing cost does not fluctuate and the loan is deductible.

     Equity-based real estate financing

     If you decide on real estate financing through equity, you can opts for either private equity through a real estate venture capital or private equity fund, or public equity. In public equity, you can opt for a listing on the local stock market, or a listing on a foreign market, such as the UK’s AIM. You should remember that raising real estate financing from the public markets often turns out to be a costlier proposition, since it involves investment banking fees and other listing procedures.

     Finally, the way in which you generate real estate financing should depend on your own strategic standpoint. Research your needs extensively before choosing any particular real estate financing route. It is imperative that you take expert help determining your needs.

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