Real Estate gets recycled. What does that mean? Well, it gets built, stabilized, cash flows, and sold. As years go on, this cycle repeats until it’s time to be redeveloped. The cycle continues again.
In this article, I will be discussing the basic life cycle of a real estate investment, and how each stage of the cycle is a wealth creation vehicle.
We will cover three topics:
- The stages of a real estate investment life cycle
- Methods of cash out
- Where you want to be in the life cycle
The stages of a real estate investment cycle:
There are several stages of a real estate investment. Starting with raw land, the property is acquired, entitled, developed, stabilized, then sold. The property is then acquired, optimized and sold and this cycle repeats itself until the property is redeveloped, and repeats again. Wealth is created during each of these stages because of 3 main things; 1) Real Estate has continued to appreciate throughout history 2) Equity built through amortization 3) There is usually an opportunity for the next buyer.
Methods of cash out:
In a real estate transaction, there are two methods of selling or cashing out; a Refinance and a Sale.
A refinance is structuring new long term debt to pay off the current senior loan and replace it for a new term. In this process, if the property is now valued more than it was when the loan was initially originated, then the new loan (depending on the LTV – Loan to value) would pay out some equity back to the owners. This amount is dependent on the current value of the property, and how much principle was due on the existing loan.
A sale is what it sounds like. It is selling ownership of the property to a new buyer. This could mean the new buyer would be paying off the existing debt and putting a new loan on the property. Or it could mean the new buyer assumes the existing debt and pays out the equity in return for ownership.
Where you want to be in the life cycle:
As you can imagine, there are many ‘places’ to operate within the stages of a real estate investment. You can operate in the land entitlement phase, the development stage, the stabilized stage, etc. There are many opinions about each of these stages but it comes down to an investor’s goals, network, and expertise. Many operators begin in one of these stages and either stick to it, or integrate their business with other stages in the cycle.
At DOVETAIL, we work with operators in all stages of the life cycle. The ultimate home-run in commercial real estate is developing a property, stabilizing it, and eventually refinancing the property at a valuation that can pay out 100% of the equity which allows you to maintain ownership without any ‘cash in’.
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