S.E.C. Real Estate Observer

• Tweet

• Tweet

Editor’s Note: This article first appeared in the March 1974 issue of the Real Estate News Observer.

When thinking about building their own estates, most real estate practitioners give up before they start because they don’t have a “nest egg” (a reasonable amount of cash for investment). This is a faulty concept because a practitioner can have his nest egg if he sets it as a goal.

Certain amounts of cash can be set aside “off the top” of fees for investment. Examine the last fees taken and add up 15% that could have been set aside for the nest egg. The history of past earned fees can indicate how much money can be set aside in the future to build a reasonable nest egg.

Once a percentage of earned fees is set aside in a separate account, it can be invested in short-term programs (buying paper at discounts, time plan deposits, bank stocks, etc.) This is a form of compound investment, as the nest egg account should only be used for investment purposes and nothing else.

Within a short time, small investments coupled with continued additions to the nest egg account will furnish funds to invest in larger transactions.

The Estate Builder must have a goal for his nest egg; for example, to provide cash flow in a few years. An Estate Builder may wish to have $600 per month as cash flow after ten years. This planning eliminates continual worry about eventual cash flow. The concept of leverage combined with the nest egg will add more benefits for the Estate Builder.

In a ten-year period, the Estate Builder will have the advantages of amortization and appreciation, by having a leverage tool in real estate. Let’s see how this works!

1. By retiring a loan over a specified period of time, this creates a form of direct savings. The investment debt at the end of the holding period is a lesser figure than at the beginning, thus your debt reduction is a form of equity gain. If you borrowed $40,000 on an office building and nine years later owed $30,000, you would have saved $10,000 during the holding period (bless the renters as they make this possible). Amortization is a nice benefit in real estate.
2. A leveraged investment in real estate gives additional desirable benefits. Check back over the past years to see how real estate in your area has appreciated. A conservative calculation would be no less than 2% per year. The beginner may be startled to learn that appreciation on an investment is not determined on the equity (if encumbered) or the loan amount, but on the total amount of the investment. Assume you purchased a $20,000 parcel of land six years ago; the property has probably appreciated a minimum of 2% per year compounded (at the end of the first year the property would be worth $20,200, the second year $20,608, etc.) Appreciation takes place even if the Estate Builder does nothing to make the property more valuable.

Other techniques affecting the growth of your nest egg account are making money by buying low, making improvements, upgrading, selling on terms, packaging the property for a developer — the list is endless.

What if you are the kind of person who cannot save money in a separate account? What if you can get the program going but will have to dip into the nest egg account to make ends meet?

This is a typical problem of many Brokers and Salesmen. Find the answer in the next issue of the Real Estate News Observer in the final part of the “Nest Egg Approach” to Estate Building.