Will You Share in the Growth of Your Investment?

We have seen that there is an excellent possibility of growth in real estate. But what is important to you is whether you are going to participate in that growth. You may think that if the property is carefully selected, bought at a fair price, in good condition, in a good loca¬tion, and well managed, and if past development is a yardstick, the property should increase in value over the years. Right you are. Now you are tempted to say that if the value of the property goes up, of necessity the value of your share in the syndicate goes up too. Unfortunately, you are mistaken.

Whether you are going to share in the growth of the syndicate depends to a great deal on the provisions of the partnership or other business agreement which you will be required to sign. This document determines whether and to what extent the growth factor has been preserved for you. In view of the continuous inflation, in view of the necessity of having your investment earn an ever larger number of dollars just to preserve your purchasing power, it is of the greatest importance to you to ascertain whether you will participate sufficiently in the growth of the venture in which you invest. The question which you must ask is: "If the value of the building increases, will my syndicate participation also increase in value?" We will tell you what to look for in the following chapters. But before we do that let us see what makes a building increase in value.

Why and How Does Real Estate Increase in Value?

How does the value of any business increase? Of course, you know the answer to that question. If the business makes more money, its value increases. And if you own a part or share of that business, your part or share will increase in value. And how does the value of a build¬ing increase? The answer is the same. If it makes more money for its owners, its value increases.

A building—I am not talking about a home but a building bought by a syndicate—is a business like any other business. If you can increase the income, the rent, and at the same time keep down your expenses, you make more money. Naturally this is not as easy as it sounds. You may not have full control over your expenses. For example, your property taxes may go up. Also you must provide reasonably good service to satisfy your tenants, who are the customers of your business. But anyhow you are not going to manage the property of the syndicate. So you do not have to worry about how this will be done.
Ordinarily, in a well managed building rents will go up when all other things become more expensive. Even if expenses go up in the same proportion, the dollar in¬come increases and the dollar value of the building in¬creases. Let us illustrate this. A building bought 10 years ago had a yearly rent roll of $100,000. Expenses amount¬ed to $88,000. After all expenses were paid, the owner had a yearly net income of $12,000 or 12% of the rent roll. Ten years later the building has a rent roll of $200,000. Now the expenses have gone up to $176,000.

Rent roll and expenses have gone up 100%. The owner has still a yield of 12% of the rent roll, but the yield amounts to $24,000. Even though the dollar may have one half of its purchasing power, our property owner has not suffered any loss in purchasing power. He takes in twice as many dollars. If he went to sell the building to¬day, he would not suffer any loss in his investment either. He could probably get twice the amount he could have gotten 10 years ago.
Things could be better or worse than in the example just given. The property owner's dollar income may have grown faster than the loss of purchasing power of the dollar, or at a slower pace. But in any event the real estate owner enjoys some measure of protection against infla¬tion. He has a built-in growth factor.

Next: How the Syndicate Agreement Affects the Growth Potential of Your Investment