Equity & Financing Strategy

June 12, 2008 · 2 comments

Well, I’m almost done with my business plan. One of the last two sections I need to address is my Equity and Financing Strategy. Because of the disastrous situations I’ve been reading about the past year in light of the subprime mortgage mess, it’s even more top-of-mind these days how important a smart financing and equity management plan is.

That said, here is the next part of my business plan:


Equity & Financing Strategy

The company aims to maintain a balanced investment strategy that uses a reasonable level built-in and purchased equity to protect against decreases in property values, while at the same time using the leverage made available through traditional real estate lending practices to maximize the asset acquisition and income production of the company overall.

Equity Strategy

In order to maintain a relatively low-risk profile across our entire asset holdings, it is the goal of the company to maintain at least 15% equity in all property holdings at all times (some exceptions may be made for value play opportunities where highly-leveraged bridge loans may be used strategically for short periods of time).

Additionally, for fundamental investments, the company will operate with the long-term goal of owning each investment outright, and will therefore only remove equity from a property when all partners in the specific investment agree that it is in the best interest of the company and partners overall.

We will attempt to accomplish these goals using the following core investing principles around equity management:

  • All new asset purchases will be made for a maximum of 85% LTV, based on both appraised and bank assumed values of the property (assuming both are available). This will be accomplished by either purchasing a property at below market value and/or ensuring that at least a 15% down-payment is made on the property at acquisition
  • Once a property is acquired, it will be the goal of the company to ensure that at least 15% equity is retained in the property at all times. This will be accomplished by ensuring that money will not be taken out of a property until there is at least 30% equity in the property, and that any money taken out of the property at a future time (via refinance, HELOC loan, etc) will still leave at least 20% equity in the property. This should protect the property equity in the case of a market downturn, except in those situations where the downturn immediately follows asset acquisition, in which case equity in the property may fall below 15%
  • Where all investors agree that it is in the best interest of a specific investment to accrue equity more quickly than the loan amortization period, the company may accelerate equity accrual by directing some or all positive cash-flow back into the property

Financing Strategy

The company will, whenever possible, use traditional financing methods to purchase assets. Specifically, the following guidelines will be used when financing properties:

  • Traditional financing options such as mortgage brokers or banks will be used to acquire funding whenever possible
  • Except in special situations, all acquired financing will be in the form of fixed-rate loans with an amortization period of between 15 and 30 years.
  • Situations that might warrant non-fixed rate loans would include: financing intended to cover short-term holding of “value play” and/or rehab properties that will be refinanced or sold or non-traditional financing necessary to satisfy seller requirements

2 responses to “Equity & Financing Strategy”

  1. about2flip says:

    Under your financing strategy, Are you going to use Equity or Debt Partners for your Down Payments? Why didn’t you mention it?



  2. J Scott says:

    For the most part, I would plan to use equity partners. While I can hopefully finance most of the costs myself, I have friends and family who are very interested in participating in some of my investments, so to allow them to share in both the ups and the downs, equity investment seems like a better way to go. Plus, none of them are very interested in just getting an 8-9% return…they want a chance at big money…


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