Skip to content

Understanding Real Estate Financial Modeling

This guide will explain the basics of financial modeling in real estate and the fundamental ideas you must know to start creating your own models for development projects.

To get you started beginning, we’ll start by delving into the most important terms you’ll need to understand before you begin building your model.

Definitions and Terms for Real Estate

LTV is “loan at a value” is the amount of financing for debt that the lender can provide as a percentage of price of the market (e.g. 80 percent, for example.)

LTC”loan to cost “loan at cost” is the amount of financing for debt that a lender can provide as a percentage of development cost (e.g. 70%)

NoI = “net operating revenue” Gross rental revenue less operating costs (property taxes as well as insurance, repairs and capital expenditures, maintenance, etc.)

Cap Rate is the net operational profit divided by the amount that the building is worth, calculated in an amount (e.g., 4.5%)

Amortization time – the amount of years or months the principal payments of a loan are spread over. The total amount of time it takes you to complete your loan (e.g. 30 years).
Structures and Joint Ventures (JVs)

The majority of developments are arranged as joint ventures between General Partners (GPs) and Limited Partners (LPs).

The most important points to remember about GPs:

Responsible for the entire management decision-making process
Fiduciary duty to act in the interest of the limited partner
Fully responsible for its actions
May have guarantees for security for borrowing

The most important points to remember about LPs:

“Limited” refers”limited liability. “limited liability”
Priority on liquidation ahead of GPs
In addition, provide capital to fund the development of the project
Do not have any control on the direction of the fund or project.

In the section on assumptions within the Financial Model

In our real estate financial modeling courses, the most important assumptions to be incorporated into the model are:

Statistics on Property
Development Costs
Purchase and sale

These topics are discussed in greater depth in our current course.
Model of Development Cash Flow

To lay the foundations for financial modeling for real estate It is essential to identify the major areas that will be constructed using assumptions from the project.

The main components of the development model comprise:

Absorption (timing and speed of sales)
Acquisition of land (capital cost)
Costs of pre-construction
Costs of construction
Cost of financing and interest
The Levered Free Cash Flow

Pro Forma and Output

After the model has been constructed It is crucial to prepare an overview document of one page or Pro Forma that could be sent to investors, bankers as well as partners and anyone else who wants to evaluate the deal.

The output pro forma must contain the following information:

Statistics on property
Summary of the schedule and key dates
Hypotheses about financing
Sales assumptions ($ total / per unit / per SF)
Budget ($ total / per unit / per SF)
Returns (IRRs)
Cost of return
Return on sales
Analyzing the sensitivities

The Cap Rate as well as Net Operating Income (NOI) Example

Net Operating Income, equivalent to gross rental revenue less operating costs (property taxes and insurance, repairs and maintenance capital expenditures) is the most important cash flow measure or profit 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 evaluate real property. A lower cap rate means the higher valued an item of real estate is. However, the more expensive the cap rate, the lower valued the property is. The cap rate and price move in opposite directions from one in the same way as bonds.

Financial Modeling Course

The best method to learn is to do taking an actual model of financial modeling for real estate gives you the step-by-step instructions to construct financial models of your own. It includes both the blank template and the finished version, which means you can create an original model or simply go directly to the finished version. The instructional video will guide you through each step through the process as you go through an example study of townhouse development project.