How can healthy debt improve the profitability of your real estate development?

At Soda Capital, we know that as a real estate developer, you face many challenges. One of the most important is obtaining capital to fund your project:

• Investors usually demand a high return on their investment within a specific period.
• Acquiring investors takes a lot of time and effort to reach the necessary resources to fund the real estate project.

As a result, healthy debt (i.e., financing resources for a real estate project that complement the capital acquired from investors) has many advantages:

• Reduces the need for investor acquisition and thus the required capital.
• Reduces the pause time between project planning, execution, and completion.
• Maximizes project profitability since the reduction in profit due to financing costs is less than the required capital reduction.

This may sound counterintuitive; however, a simple example can illustrate this. Suppose:

• Total sales revenue of the real estate project: $100
• Associated construction costs (hard and soft costs): $75
• Required resources: $75
  • In the first case, everything is fund ed with investor capital.
  • In the second case, $45 is funded with investor capital and healthy debt of $30.
• Debt cost: 20% annually
• Tax rate: 30% Viewing profitability as the return given to the investor as follows: ROE (Return-On-Equity) = (Net Profit) / (Investor Capital), the results of these scenarios are summarized in the following table:

The table above shows that acquiring healthy debt, which reduces the investor capital requirement by 40% (from $75 to $45), only decreases net profit by 24%, increasing profitability (ROE from 23% to 30%) by 6 percentage points.

At Soda Capital, we grant loans for real estate developments, always taking care of your project's profitability.