The Glue Transaction – Creative Real Estate Financing
A glue transaction is any financial transaction that occurs when there glue person puts up his reputation or good name and possibly creedit and the other parties put up the cash to bring the deal together. This is the basis of many joint-ventures where the partners with the money put up all the cash and do the transaction with a glue person or glue entity. It is important to remember in a glue transaction that generally it is the parters with the money that come to the glue person and not the other way round.
Example of Glue Transaction
Insurance companies often seek out real estate developers with good track records in an area to become joint venture partners with. The insurance company puts up the money and the developer does what he has been doing for years, only this time he has a built a number of loan sources and now has a partner.
Seven Rules to follow in a glue deal
1. Real Estate value is related to the actual or potential income from a particular real estate investment.
2. The value of a particular real estate investment goes up when the potential income increases, on the other hand the value goes down when the potential income decreases.
3. If an investor can make a real estate investment before the potential increase in the rental income of the property, you are increasing the odds that you will have increases in the value of the property.
4. Real Estate value is based on a capitalization rate of the income. Therefore if the anticipated yield is 10% on actual cash received and the net operating income is $10,000 the value would be $100,000.
5. Every dollar of incresase in the net operating income will increase the value of the real estate by the multiple of the capitalization rate. Therefore if we use our previous example if the rental income went up to $15,000 the value of the real estate will go up by over $50,000.
6. Profit is the increase of equity above your initial investment. Therefore if you put $10,000 on a property worth $100,000 that had a net operating income of $10,000 and you increase that income to $15,000 then the value of your investment has gone up by $50,000. You increased the income of the property by 50% and your value went up by the same percentage. However you equity has increased from $10,000 to $60,0000 this is an increse of over 600%
