This guide will provide the basics of financial modeling for real estate and the fundamental concepts to help you start creating your own models for development projects.
To begin beginning, we’ll start by explaining the most important terms you’ll need before you begin building your model.
Definitions and Terms for Real Estate
LTV is “loan in value” is the amount of financing for debt that the lender can provide as a percentage of marketplace value (e.g. 80 percent, for example.)
LTC”loan to cost “loan for cost” The amount of financing for debt that a lender provides as a percentage of costs of developing (e.g. 70%, for example.)
NOI is “net operating earnings” Gross rental revenue less operating costs (property taxes as well as insurance, repairs and maintenance, capital expenditures etc.)
Cap Rate is the net operational earnings divided by the amount that the building is worth, calculated in an amount (e.g., 4.5%)
Amortization period is the number of months or years the principal repayments of a loan are spread over. The length of time that it will take you to repay your loan (e.g. 30 years).
Structures and Joint Ventures (JVs)
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The majority of developments are arranged in a joint venture with General Partners (GPs) and Limited Partners (LPs).
Important points regarding GPs
Responsible for the management of all decisions
Fiduciary duty to act in the interest of the limited partner
Fully responsible for its actions
May offer guarantees as security for borrowing
Important points about LPs
“Limited” refers”limited liability. “limited liability”
They have priority in liquidation ahead of GPs
Fund the capital needed to finance the development of the project
Do not have any control in the administration of this fund or project.
The Assumptions section in the Financial Model
In our financial modeling for real estate course, the most important assumptions that will be entered into the model are:
Purchase and sale
They are covered in great depth in our current course.
Model for Development Cash Flow
To lay the foundations for financial modeling of real estate It is essential to identify the major areas that will be constructed upon the assumptions of the project.
The most important parts of the development model comprise:
Absorption (timing and speed of sales)
Acquisition of land (capital cost)
Costs of pre-construction
Costs for construction
Cost of financing and interest
The Levered Free Cash Flow
Pro Forma and Output
After the model is constructed It is crucial to prepare an overview document of one page or Pro Forma that could be sent to investors, bankers or partners, as well as any other person who has to review the deal.
The output pro forma needs to contain the following details:
Statisticians on properties
Summary of the schedule and key dates
Hypotheses about financing
Sales assumptions ($ total / per unit / per SF)
Budget ($ total / per unit / per SF)
Cost of return
Return on sales
Analysis of Sensitivity
The Cap Rate as well as Net Operating Income (NOI) Example
Net operating earnings, equal to gross rental income less operating costs (property taxes and insurance, repairs, maintenance capital expenditures) is the primary measure of cash flow or profitability that is used to assess the real estate development process.
Cap rate that is equal to the net operating profit divided by worth of the property is expressed in percentage, and is used to determine the value of real property. A lower cap rate means the higher valued the real estate is. Likewise, the more expensive the cap rate, the less valuable the property is. Cap rate and price change in opposite directions from one in the same way as the bond.
Financial Modeling Course
The most effective way to learn is to do by doing, and completing the real property financial modeling course will give you the step-by step instructions to construct financial models of your own. The course comes with the blank template and the finished version, which means you can build an original model or go straight to the final version. The instructional video will guide you through every step through the process as you complete an example study of townhouse development project.