Stage 1 – The Uses
Acquiring real estate assets involves different costs, below is an example of a typical investment:
- Asset acquisition price – $15 million.
- Closing Costs – renovation costs, acquisition fees, transfer taxes, appraisal cost, legal cost, etc.
For this example, the total renovation cost is $4.5 million and all other closing costs are $0.5 million.
- All in Costs – acquisition price + other costs sum up to $20 million needed to close the deal.
Stage 2 – The Sources
The investment sources are as follows:
- $1 million from the sponsor’s money.
- An additional $9 million from investors.
- A senior loan of $10 million.
Which brings us to a total of $20 million.
Hooray! The deal is closed!
Stage 3 – Asset Operation (annual)
Now is the time for renovations and to start operating the property.
The total annual rent is $2 million.
Operating expenses (Opex) are $900k. This included utilities, landscaping, repairs, real estate tax, etc.
Based on the above the Net Operating Income (NOI) is $1.1 million.
The annual interest on the bank loan is $300k.
Now the excess $800k can be distributed to the investors.
$800k on an equity of $10 million brings us to an annual cash yield of 8%!
If you invested $100k, you get back $8,000 per year.
Stage 4 – Asset sale
An offer to sell the asset for $25 million was received!
Upon accepting the offer and selling the asset, the $10 million loan will have to be paid off.
$15 million can be distributed minus any additional closing costs.
We made a 50% profit on our original investment!