Economical Factors No Real Estate Agent Will Explain You: Part 3 - Flow of Funds

The set of articles should act as a guideline for current and future real estate investors and it will explain some basic fundamentals to follow, that no real estate agent explain you about.

Flow of Funds - a set of accounts that is used to follow the flow of money within various sectors of an economy. Specifically, the account analyzes economic data on borrowing, lending and investment throughout sectors like households, businesses, construction, foreign investments, financial markets, etc.

 

Flow of funds into real estate sector:

 

Family Homes - Where the flow is in the early stage it is beneficial to buy, but where the trend is well established it is beneficial to hold

   Buy/Hold 

Apartments - Where the flow is in the early stage it is beneficial to buy, but where the trend is well established it is beneficial to hold. Follow taxation laws

   
   Buy/Hold

Raw Land - Buy when money begins to flow and hold when money is flowing. Allow some time for adjustments, seek signs of declining.

  
  Buy/Hold

  Office - Buy when money is flowing into office building Hold during that period.

  Retail - Buy when money is flowing into office building Hold during that period.

Flow of funds out of real estate sector:

Family Homes - When the money start flowing away of real estate market it is beneficial to sell at that or before it as prices will decline

   
  Sell

   

Apartments - When the money start flowing away of real estate market it is beneficial to sell at that or before it starts declining. Retain in case you can maintain;

   
  Sell/Hold

  Raw Land - When trend becomes well established it is too early to Sell, try to sell  

  before that, otherwise Hold

  Office -  When trend becomes well established it is too early to Sell, try to sell before 

  that, otherwise Hold

  Retail - When trend becomes well established it is too early to Sell, try to sell before    

  that, otherwise Hold

       Corollary; national trends have direct impact of capitalization rates (Cap rate) and indirect impact on Net Operating Income (NOI). The aim for each property owner is to have inflation increase on your rent charges to a greater percentage when your expenses. The result of that is to have NOI increases actually to exceed the rate of inflation on % basis. Borrowing rate (interest rate) on the amount financed should be less than prevailing market capitalization rate. Low and moderate inflation rates generally keep interest rates low, as borrowers do not demand high rates for fear of inflation. Flow of funds by divided by sector, time and amount is a good indicators which investment sectors are attractive and performing well according to current market. When stocks are hot – real estate is not. Saturated sectors leave little room for growth, so it is recommended to sell before it starts declining.

 Interest Rates up = Capitalization Rates up;

Capitalization Rates up = property Prices down;

Interest Rates down = Capitalization Rates down;

Capitalization Rates down = Property Prices Up;

High Inflows of funds = Capitalization Rates down;

Capitalization Rates Down = Property Prices Up;