REFM: Real Estate Financial Modeling Ultimate Guide w Templates

This short program is an excellent introduction to real estate development for entrepreneurs just starting in the business or joining an existing real estate development team. Typically, it starts with a concept and ends with a fully developed property ready to be purchased or leased. A real estate developer has the skills and education to identify opportunities and the connections necessary to get a project completed.

  1. Past this point, we create a waterfall schedule to split up the cash flows to the Developers and Investors based on the overall Equity IRR.
  2. After calculating sales (total, $/unit, $/SF), sales commissions (e.g., 50%), and warranty, we can figure out the net proceeds from this project.
  3. The growth rates for all of those, especially the income sources, are also important.
  4. Spreadsheets for the multiperiod DCF analysis for the Veranda example are available here.
  5. Construction materials used in commercial applications are more expensive than residential, usually because they’re heavier duty, longer lasting and more resilient.

In actuality, the development loan will be done in four phases and will not reach the $12,554,100 shown in the analysis (total development costs of $16,554,100 minus equity of $4,000,000). A principal shortcoming of quick and dirty analysis is the back-of-the envelope methodology. Interest is estimated by assuming real estate development model that it takes one year to develop the project with an average loan balance of $6,277,050, or $470,779 total interest. The Cash Flow Model begins with the revenue build up, monthly expenses, financing, and finally levered free cash flows, NPV (net present value), and IRR (internal rate of return) of the project.

All-in-One (Ai Walkthrough #2 – Office, Retail, Industrial Rent Roll Tab

The IRR hurdles here create a “waterfall model” because the deal’s overall performance changes the percentage that goes to the Developers vs. Investors. The key difference is that something significant about the property changes during the holding period, and the owners spend something to enact this change. The growth rates for all of those, especially the income sources, are also important. If the property does not change significantly, it’s best to make a conservative assumption that the Cap Rates rise over time. That means that we take the Year 1 Net Operating Income (NOI) of the property ($567K) and divide by the 5.80% to determine the price. We’ve hard-coded the acquisition price here, but it’s based on a Cap Rate of 5.80%.

Assumptions Section of the Financial Model

All investing is probabilistic, so a simple model cannot tell you if a property will generate an 11.2% or 13.5% annualized return. We can now calculate the levered free cash flows and resulting IRR of this project. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

Explanation of the Stages of Analysis

Amortization period – the number of months/years the principal repayments of a loan are spread out over. The total length of time it will take you to pay off your mortgage (e.g., 30 years). We can calculate the net proceeds from this project by calculating sales (total, $/unit, $/SF), sales commissions (e.g., 50%), and warranty.

The Profitability Index (PI) is a ratio that calculates the present value of future cash flows versus the initial investment. In real estate development deals like this one, Developers often earn higher percentages when the deal’s IRR increases; the waterfall structure incentivizes them to perform well. Once the tenants have moved in and the property has stabilized, we’ll sell the excess land and eventually sell the property itself. For more about individual properties and how the differences translate into revenue and expenses, please see our detailed article on the real estate pro-forma.

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