If you are a real estate developer, the need to build a real estate financial model is crucial, especially to help determine and analyze if an investment opportunity is good or not. Real estate financial modeling is, of course, not as easy as it sounds. You need to specifically design the model as to accommodate the key assumptions which affects the value of the property such as the:
· Land Acquisition Cost
· Interest Rates and Financing
· Building Materials and Labor (Pre-construction and Construction costs)
· Absorption rates (timing and pace of sales)
· Sales Prices
· Market Expenses
· Permits or Warranties
In real estate financial modeling, you will also need to learn about certain real estate terms to better understand the model. The following are the key terms used in a real estate model:
· LTV – also known as the loan to value, is a financial term used by lenders to calculate the ratio of a loan to the value of the asset purchased.
· LTC – also known as the loan to cost, another financial term used by lenders to calculate the ratio of the cost of development of a project or asset.
· NOI – the short term for net operating income, which is used to calculate the ability rate of a real estate investment to produce income.
· Cap Rate – also known as the capitalization rate of a property, it is calculated by taking the net operating income then divide it by the value of the property.
· Amortization Period – this term is pretty much self-explanatory, it is the time period it will take to pay back the mortgage in full.
Of course, these are just the most basic terms that you will encounter in real estate financial modeling. If you want to learn more on how to create a real estate model, solidify your knowledge and skill in financial modeling. Worry not, you can simply learn financial modeling today via online, so you will have the luxury to learn whenever and wherever you go! You can also checkout the real estate financial model templates at eFinancialModels so that you will have references for real estate financial modeling.