Real Estate Sales Driver

The main formula that stimulates real estate investment is as follows:

• EAHE – Expected Appreciation Rate on Home Equity
• HP – Home Price
• L/V – Loan-to-Value

Since real estate can be acquired with high leverage, there is an opportunity for significant returns on invested equity. For instance, if the expected annual appreciation rate is 3% and the loan-to-value ratio is 80%, the anticipated increase in equity value would be around 15%. In the case of Georgia, this represents an incredibly profitable opportunity.

Due to high competition, local developers mitigate sales risk by offering long-term installment plans without requiring an initial down payment. Once the buyer’s contribution exceeds 20%, they can qualify for a mortgage.

This structure is further supported by credit regulations from the National Bank. If a developer takes out a loan, their project is fully financed, freeing them from dependence on cash flows from sales. For developers, it then becomes more critical to insure against sales risks. Meanwhile, banks monitor buyer payments, making it easier to decide on mortgage credit approvals.

Moreover, a significant price gap naturally exists between properties under construction and completed ones. Assuming an 8% annual price increase and financing 70% through a loan, the anticipated increase in equity value reaches 27%.

Naturally, we must also consider interest expenses on the loan. However, given the current market equilibrium, these expenses will be minor if the loan is taken out upon project completion and the property is sold or rented shortly after.

P.S.

When investing in real estate, remember that this is a cyclical sector. Due to the so-called “bullwhip effect,” land price increases can drive up apartment prices, and vice versa. Periodic bubbles in the sector are almost inevitable. Therefore, while the impact of price appreciation on returns is enticing, the potential downside from price drops is equally risky.

Adapted from:

Real Estate Finance & Investments by William B. Brueggeman; Jeffrey D. Fisher