The Value of Good Debt

Justin here! Since interest rates have been such a hot topic of conversation over the past year, I thought it would be fun to dive into this simple question: why is debt so important in real estate?

Without getting too deep into the boring finance stuff, we'll keep it simple. Debt is essential for real estate because real estate requires lots of money! Take your home, for example. The median home value in America right now is around $440k. Do you know anyone who has that much money lying around???

Because of this, it makes sense to borrow a large portion of that. And since the bank feels, generally speaking, that you are likely to keep a good job and make monthly payments, they aren't too upset about lending money and getting a nice little return (around 7% for a 30-year fixed mortgage). Now consider a commercial building that costs $100 million. That's a big check for someone to write! And with big check writers like pension funds, sovereign wealth funds, etc., they are looking for places to put money where they know the risk is relatively low. In exchange for getting paid first, debt usually takes a lower fixed return. That is the important part. The leftover equity gets paid last, so if a real estate asset goes down in value, the equity is at risk of making a small return or maybe even losing money. When the real estate goes up though, the equity actually makes more return because the debt's return is fixed! (this is the value of leverage).

Let's use an example that will explain why the real estate market is so upside down right now. Prices are high, rates are high, rents are high... what is going on here?

Well, if an investment property costs $400k and the rent is $2000 a month, that seems reasonable, right? Most people think the bank will just automatically lend you 80% of the value. But that is not necessarily true in today's climate. The lender is going to look and say:

1. You make $2000 a month, so that's $24,000 a year.
2. After expenses, your operating income will be roughly $15,600.
3. We want to ensure for every $1 we lend, you have enough income to cover $1.25. That means we will lend you enough money so that your annual debt payment is $12,480.
4. With a 7% lending rate, that's around $178,285 we can lend you (assuming interest only)
5. That is only about 45% LTV, ouch!

In this example, the buyer has to come up with over $221k out of pocket to buy this property!

Fortunately, VictoryBase secured debt financing prior to the excessive rate hikes. We have a 48-home community secured by a 10 year 5.6% debt note, and a 50-unit Class A apartment building secured by a 25-year 5% note! Because of this, our assets enjoy much lower debt service payments than what we could find today.

The best part is that anyone can invest with us (even our residents). If you want a real estate investment but cannot find the right deals in today's market, we already did the work (and got the good debt!). Visit our portal at www.wefunder.com/victorybase and read through the offering. You can make an investment for as little as $100 and join the movement.

See y'all next week.

-Justin

At VictoryBase, we are changing the traditional home rental model by turning renters into residents and investors. We find great real estate in military markets, find awesome residents to live in our homes, and allow those residents and the public to invest in us. As investors, our residents can now build for their future without wasting money solely on rent.

This is not an offer; offers will be made only by means of the Regulation CF (available at www.wefunder.com/victorybase), which may be updated or amended from time to time with the most recent Form-C. The Regulation CF offering is for both accredited and unaccredited investors. Terms of the offering are only available through our funding portal noted above.