Unless you are a cave dweller, you are surrounded by other people’s real estate investments.
People who keep up with the economic news are familiar with the names Donald Trump, Del Webb, William DeBartolo, The Rouse Company, Gerald Hines, and The Taubman Company. They have built some of America’s most visible, well-publicized projects within the commercial real estate development industry. However, what these people do for a living is no different, except in scale and notoriety, than what local developers do, every day, in every city and town in America.
The entrepreneurs who build and/or own neighborhood bank buildings, office buildings,
and local grocery stores are working at the same trade as Donald Trump and company, only on a more practical and local level. Without these people, our towns and cities as we know them would not exist.
Commercial real estate development is defined as the creation of real property investments,
“realty,” as opposed to personal property, or “personalty.” When buildings are built they become permanently attached to the land and, therefore, forever part of the real estate. Commercial real estate development is the business of creating this income-producing real estate. Why and how is this done? What prompts builder, buyer, and tenant to get involved is the attraction of using leverage to increase their profit. Leverage is the reason real estate investment can work for everyone.
A simple example of leverage occurs when people use a mortgage to buy a home. If you buy a property for $100,000, using a conventional down payment of 20 percent, you need to borrow $80,000 to complete the purchase (also known as 80 percent loan
to value). Simplistically, if you sell the property in one year for $120,000, you have made a gross profit
Buzzwords of $20,000. However, the deal is better than it
Leverage is the principle appears, as you have used the leverage of the borby
which we use other people’s rowed $80,000 to increase the rate of return from 20
money (OPM) to increase the rate percent on the gross price of the property, to a 100
of return on our capital investment. percent rate of return on the $20,000 cash down payment
you originally invested ($40,000 from $20,000).