Understanding real estate finance is critical for everyone involved in investment commercial real estate. Yet, real estate finance can be a complicated and overwhelming topic to tackle. This collection of real estate finance resources can help.
What is Real Estate Finance?
First of all, what exactly is real estate finance? Finance is the study of money and real estate is simply property consisting of land and buildings. So, real estate finance can be defined as the study of cash flows associated with real estate.
So, now that we have a definition of real estate finance, what are the most important real estate finance concepts you need to know?
Real Estate Market Analysis
A real estate market analysis informs all of the financial projections that ultimately determine a property’s value. It’s important to get a good understanding of the market prior to completing a financial feasibility analysis. Here are some resources on real estate market analysis:
The Real Estate Proforma
The first step in analyzing any investment real estate transaction is to build a real estate proforma, which is just a cash flow forecast. Before you can analyze real estate cash flows you must first forecast the cash flows! A real estate proforma allows you do this.
Simple Measures of Investment Performance
Once you have your real estate proforma or cash flow forecast, then you can begin analyzing those cash flows. Simple measures of investment performance include the gross rent multiplier, cap rate, and cash on cash return, plus a variety of other useful ratios.
Discounted Cash Flow Analysis
Discounted cash flow analysis takes into account the time value of money and therefore solves many of the problems associated with simple measures of investment performance. Discounted cash flow measures include present value, net present value, internal rate of return, and the modified internal rate of return. These concepts can be confusing but we have some resources that will make this easy.
Most commercial properties are funded with debt so understanding commercial loans is critical to real estate finance. Commercial loans are much more complex than residential loans so it can be challenging to understand how commercial lending works. We have some resources that can help.
To bring all of these real estate finance concepts together we’ve included a few commercial real estate case studies. These cash studies will walk you through the financial analysis of a building step by step.