Real estate business is an immensely profitable business,
but it necessarily involves considerable amounts of money.When it is planned
to raise real estate financing, it is important to know at what stage of
development the project in question is. Financiers are quite well conscious of
the fact that the intermediary phase calls for the maximum possible amount of
required funding. They will naturally be anxious to know for what the funds
will be used.
The financier is very much particular about the strength
of the management team, because management is a critical element assessed by
lenders. Financiers will wish to see the business plan also.This means that
the estimated project costs need to be projected for at least the first several
months and maybe even longer. A new plan and cost estimate will be needed to drawn up, since every individual
project has its own specific funding requirements at various development
stages. In a Real Estate project, there is no general yardstick for start-up costs.
Quantum of Funding
Depending upon the project magnitude, some require only
minimal funding, while on the other hand others will entail huge costs in
inventory or equipment. It must be ensured that sufficient funding is in
possession to see the project to completion. For a reasonable estimate of
overall costs all 'soft costs' must be included during the inaugural stage.
These contain the fee for obtaining permits, engineering costs and infrastructure
and construction costs. The continuous expenses for utilities, inventory,
insurance etc, also must be factored in. All unnecessary costs must be
eliminated and a realistic budget be arrived at, to complete the project at hand.
The start-up costs could be calculated effectively with a worksheet that
mentions all possible cost categories, both one-time and ongoing.
From then on, regular financial statements must be maintained.
These provide a ready financial history of the project and helpful in the
timely detection of anomalies that could eventually result in heavy losses. As
far as possible, the real estate financing should be raised through one's own resources. Thereafter, there are options of debt and equity financing available.
Debt Financing
In the debt-based Real
Estate Financing, money is borrowed 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 to which he is financing.
In the option where one do not wish to surrender any
ownership interests in the business, debt financing is more suitable. In debt
financing, the financing cost does not fluctuate and the loan is deductible.
Equity-based Financing
If Real Estate financing is decided through equity, one
can opt for either private equity fund, or public equity.In public equity, one
can opt for a listing on the local stock market, or a listing on a foreign
market, such as the UK's AIM. It should be borne in mind 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.Eventually,
the way in which the real estate financing is generated should depend on one's
own strategic standpoint. Before deciding on any particular real estate
financing route, one's needs have to be extensively researched.It is
absolutely essential that expert help has to be sought in determining one's
needs.
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