Make One Dollar Do The Work Of Ten
February 6th, 2012 | 
Author: Make One Dollar Do The Work Of Ten
The real estate syndicate is a pooling of resources of many investors to buy a building or longterm leasehold.
A lever is one of the oldest tools known to man. You want to move a heavy stone which you could not budge with your bare hands. A lever applied in the right place will enable you to do the job for which otherwise several men would be required. Investment leverage works the same way. A dollar strategically placed can do the work of several dollars. An illustration of the operation of leverage follows.
Suppose that a syndicate acquires a property for 1250000. 250000 is paid cash. The syndicate gives a mortgage for 1000000. Assume that the value of the building increases over a period of 5 years by 20. It will then be worth 1500000. Such an increase in value is by no means farfetched or unusual. During the last 5 years many properties increased far more than 20.
At the time the syndicate acquired the property it did not have to raise 1250000. All it needed was 250000 cash. If it were to sell the property for 1500000 it would make a 250000 profit or double its cash investment of 250000. Note that while the value of the propcity went up only 20 the profit on the investment was 100. This is not bad but it is only part of the story.
During the five years when the syndicate owned the property it made payments on the mortgage. Part of these payments were to defray interest. But each year part of the payment was applied to reduce the mortgage. This is another way of saying that part of this money was used to pay back the loan secured by the building.
Assume now that during the 5 years the syndicate paid back 250000 on the mortgage. Then at the end of 5 years it owes only 750000 on the mortgage. When the syndicate now sells for 1500000 it will get 750000 cash above the mortgage.
Now take another look at the dollar amount the syndicate invested and the dollars it got back on its investment. It invested 250000 cash. Five years later its net worth had grown to 750000 or 200. This was accomplished although the building which the syndicate owned increased only 20 in value. If you had invested your money into anything else which would have increased in value by 20 every dollar invested would have increased to 1.20 in value.
In our example the value of the building increased 20. Yet every dollar invested is now worth 3.00. In one case the increase in value for each dollar invested is 20 cents. In the case of the building the increase amounts to 2.00. Your money invested in real estate grew 10 times as fast as it might have otherwise.
Will you Share In the Growth of Your Investment?
We have seen that there is an excellent possibility of growth in real estate. But what is important to you is whether you are going to participate in that growth. You may think that if the property is carefully selected bought at a fair price in good condition in a good location and well managed and if past development is a yardstick the property should increase in value over the years. Right you are.
Now you are tempted to say that if the value of the property goes up of necessity the value of your share in the syndicate goes up too. Unfortunately you are mistaken.
Whether you are going to share in the growth of the syndicate depends to a great deal on the provisions of the partnership or other business agreement which you will be required to sign. This document determines whether and to what extent the growth factor has been preserved for you. It is of the greatest importance to you to ascertain whether you will participate sufficiently in the growth of the venture in which you invest.
This type of investment can potentially give very good yields. Good luck!
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