Real Estate Financing
Tomasz Wozniak 
August 22, 2022
Tomasz Wozniak
August 22, 2022 Part of our offering at Holocene Impact Capital revolves around real estate financing. In essence, real estate financing is a transaction during which an investor raises capital from an outside source – this capital is then used to purchase the target property. In this Newsletter we will cover the main points concerning real estate financing such as:
There are advantages to raising outside capital to fund a real estate transaction.
First, using leverage increases ROI (return on investment) – consider the purchase of an investment property worth $1,000,000 with a net income of $60,000 per year – that would mean 6% ROI. Now, let’s consider that instead of purchasing the property in cash, the investor is looking to borrow 65% of the purchase price ($650,000). Let’s assume that the cost of that loan is 5% per year and the loan is structured on an interest only basis. The annual cost of financing would then be $32,500 and the annual net cash flow would be $27,500 (rental income of $60,000 minus annual cost of financing of $32,500). That translates to 7.86% ROI per year. Moreover, in this example our investor would purchase the property while holding onto $650,000 in cash that can be used for other opportunities.
Second, depending on the jurisdiction, investors might be eligible for various tax advantages when using financing. For example, in the UK professional landlords operating their portfolios under limited companies might be able to include interest payments in their companies’ expenditures. As always, taxation is complicated and requires professional advice – if you need any help with that, please let us know and we will be able to connect you with relevant professionals.
The real estate financing market offers a variety of solutions. Below you will find a summary of different products that we can arrange.
Long term finance – this product allows you to purchase existing assets which typically produce income at the point of purchase. The duration of the loan usually goes from 2 to 30 years and can be arranged on amortizing or non-amortizing basis (the former assumes monthly repayment of interest and principal while the latter assumes that the monthly payment covers interest only and the principal is paid back at the end).
Development finance – this is a specialist product that is used when buying a property which requires refurbishment or a site on which an investor is planning to build a property. Assets purchased with this type of financing are typically not producing any income. Therefore, interest payments are added on top of the principal and paid when the loan is redeemed at the end of the term. Borrowers can access funds for initial acquisition of property or land as well as for actual construction. Duration of this loan typically matches the duration of the construction product – once the property is finished the loan can be refinanced into a standard term product or the property can be sold.
Short term financing – also called bridging finance. Typically restricted to duration of 12 months (although some lenders can extend that to 24 months), this type of financing offers very quick execution and is ideal for situations when speed is of the essence. Common example might be purchase on auction – auction purchases close much quicker than traditional transactions. Another good example when bridging finance can work for you is purchase of property while simultaneously selling another asset. An investor might have existing investment property which is currently being sold while at the same time they are looking to purchase new property. In an ideal world, the investor would sell this existing property before purchasing the new one. However, sometimes there is a gap in timing. In this case the investor can use short term finance to “bridge” the gap – borrow money against the new property and then repay the loan once the existing property is sold. Similarly, to development finance, interest is repaid on redemption of the loan.
Equity financing – Instead of borrowing money, an investor could invest alongside the provider of equity, and they would then both benefit from the total cash flow and increase in value of the asset. It’s worth pointing out that most transactions that include equity financing would also include debt financing. The two are not exclusive.
At Holocene Impact Capital we work with a variety of clients seeking a variety of solutions. We also work with a broad range of funding partners which allows us to structure solutions such as:
This was a summary of just a few of our projects – there are a lot more ways of taking advantage of current real estate financing options, so make sure to get in touch with us at [email protected] and we will be delighted to discuss further.