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H OLDING S TRA TEGIES AND E XIT S TRA TEGIES

When the cost of borrowing money is cheap you can get a better
price for your real estate because the leverage is better. Leverage is
the difference between the rate of return on a “free and clear” basis
and the rate of return on invested capital. For example, suppose you
are buying a small office building for $10 million and the annual cash
flow is $1 million. That’s a 10 percent return on a free and clear
basis. Now instead of buying the property for all cash, assume you
take out a mortgage of $8 million (80 percent of the purchase price) at
an annual interest rate of 7 percent. The annual cost of the mortgage
portion of the investment is $560,000. The annual return on your $2
million investment is $440,000 or 22 percent on your cash. That’s
how fortunes are built.
There is usually a high demand for real estate when the stock
market and the bond market show low returns. It is also true when
the rate of exchange of the dollar for foreign currencies is low be-
cause foreign investors see bargains in the making. When the rate of
inflation starts to rise dramatically buyers will often flock to real es-
tate because increase in real estate prices and rents seem to rise in
line with the rate of inflation.
If you have a piece of property in an area that is deteriorating as
indicated by “for sale” or “for rent” signs or by increased boarded up
or vacant stores or buildings and you have no solid information as to
when this cycle will change—get out! Take a loss, if you have to, but
get out! If interest rates are rising and you have a mortgage, which
will be coming due shortly, sell, preferably to an investor that has lots
of ready cash, but sell!
If you own a building which is going to be adversely affected by a
change in traffic patterns or new interstates or highways, sell as soon
as you have reason to believe that any of those items will become a re-
ality. If you have a building that you believe will be adversely affected
by some new construction in the area, that’s also a time to sell. This

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