What is Financial Engineering and Why It Matters in Real Estate Investments

Posted on March 18, 2020

Financial Engineering and Real Estate Investments | CGI Strategies

In today’s market, clarity is key. Looking at the entire picture is especially critical during times of crises, and that is what we intend to do at CGI Strategies.

Financial engineering is something that investors should always be cognizant of, especially in a volatile market.

What is Financial Engineering?

Financial engineering involves the borrowing process and the subsequent reporting process. During the reporting process, a clear picture isn’t presented in order to improve a transaction’s bottom line.

While not always a bad thing, we think that a clear picture is the way to go. Here are some things to look out for:

  • Quick sales – Savvy real estate investors know that wealth isn’t created by selling an investment in 2-3 years. Selling quickly, however, will show a spike that doesn’t give a potential investor the whole picture, since not enough time was put in.
  • Lines of credit – When borrowing in private real estate equity, it’s common to be backed by not only an asset but capital commitments. If these commitments aren’t repaid quickly, the whole picture is again – very much distorted.
  • Look at the business plan – Even deals with the best numbers don’t show what’s on the inside. It’s important to understand what kind of returns are needed to substantiate the amount of risk that you’re taking.
  • Refinancing and reappraisal – After a property is upgraded, it’s entirely possible to reappraise and take on a bigger loan. If that money all goes into the management of a property, that results in more risk. Look at the whole picture after a reappraisal and the refinancing that follows.
  • Hiding ground leases – Ground leases should always be disclosed, and the deal should always come with a lower price. If not, when that lease isn’t paid upon, any financial gain is diminished.

The bottom line is, as always, get the whole picture. Practice due diligence and the result will be smart investments, every time.

Ready to invest with CGI Strategies? Contact us now.

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