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, what exactly is real estate finance? Finance is the study of money and real estate is property consisting of land and buildings. That means real estate finance can be defined as the study of money associated with real estate.
Real estate finance is the study of cash flows associated with real estate, and is critical for anyone involved in investment in commercial real estate. Understanding the basics of real estate finance is important in order to make informed decisions about real estate investments, and to be able to evaluate and analyze the financial viability of a real estate investment opportunity.
Overview of Real Estate Finance
One of the most important concepts in real estate finance is real estate market analysis. This involves researching and analyzing the current real estate market in order to determine the value of a particular property. Factors to consider in real estate market analysis include physical and environmental factors, such as location and zoning, as well as supply and demand dynamics for a specific type of property, such as apartments or office buildings.
Once you have a good understanding of the real estate market, the next step is to build a real estate proforma, which is a cash flow forecast for a real estate investment. The proforma is used to analyze the potential cash flows from the investment, and is the first step in determining the financial feasibility of a real estate investment opportunity.
Simple measures of investment performance include the gross rent multiplier, cap rate, and cash on cash return, which are used to evaluate the potential return on investment for a real estate property. However, these measures have limitations, and do not take into account the time value of money.
Discounted cash flow analysis is a more comprehensive method of evaluating the financial viability of a real estate investment opportunity, as it takes into account the time value of money. Measures of discounted cash flow include present value, net present value, internal rate of return, and the modified internal rate of return. These measures provide a more accurate representation of the potential return on investment for a real estate property, and are important tools for evaluating the financial viability of a real estate investment opportunity.
Commercial real estate finance also involves understanding commercial loans, as most commercial properties are funded with debt. Commercial loans are more complex than residential loans, and it is important to understand how commercial lending works in order to make informed decisions about real estate investments. Key concepts in commercial lending include debt yield and debt service coverage ratio, which are used to evaluate the financial viability of a commercial loan.
Real Estate Finance Resources
Real estate finance is a complex and multi-faceted field, and understanding the basics is critical for anyone involved in investment in commercial real estate. From market analysis to discounted cash flow analysis, commercial loans, and case studies, there are many resources available to help improve your real estate finance knowledge and skills. Whether you are a seasoned real estate investor or just starting out, taking the time to understand real estate finance can help you make informed decisions and achieve success in your real estate investments.
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:
Why is Real Estate Market Analysis so Important?
Getting Started with Real Estate Market Analysis
Physical and Environmental Factors in Real Estate
How Shift Share Analysis Works
How the Location Quotient Works
How Economic Base Analysis Works
How to Analyze Supply and Demand for Apartment Buildings
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.
What is a Real Estate Proforma?
Rentable versus Usable Square Feet
Understanding Triple Net (NNN) Leases
Understanding Net Operating Income
Understanding Replacement Reserves
How Market Leasing Assumptions Work
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.
How Discounted Cash Flow Analysis Works
What is the Internal Rate of Return (IRR)?
What is the Net Present Value (NPV)?
What You Should Know About the Discount Rate
How to Use the Modified Internal Rate of Return (MIRR)
Commercial Real Estate Waterfall Models
Commercial Loans
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.
How Commercial Real Estate Loan Underwriting Works
Debt Service Coverage Ratio (DSCR)
Case Studies
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.