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These are discussed in great detail in our actual course.
Development Cash Flow Model
To set the foundations of real estate financial modeling, it is important to cover the key sections that will be built based on project assumptions.
The key sections in the development model include:
Absorption (timing and pace of sales)
Land acquisition (capital cost)
Financing and interest expense
Levered Free Cash Flow
Output and Pro Forma
Once the model is built, it’s important to create a one-page summary document or Pro Forma that can be shared with bankers, investors, partners, and anyone else who needs to analyze the deal.
This output pro forma should include the following information:
Schedule – summary key dates
Sales assumptions ($ total / per unit / per SF)
Budget ($ total / per unit / per SF)
Return on cost
Return on sales
Example of a Real Estate Financial Model
This is an example of the one-page output from our real estate financial modeling course. As you can see, it clearly displays all the information listed above and makes it easy for someone to evaluate the deal.
Here is an example of the actual inner workings of the model, where you can see absorption by month for the development project, which builds up to revenue and, ultimately, cash flow.
These foundations of real estate financial modeling are covered along with much more detail in our online course.
Cap Rate and Net Operating Income (NOI) Example
Net operating income, which is equal to gross rental revenue less operating expenses (property taxes, insurance, repairs & maintenance, capital expenditures), is the key profitability or cash flow measure used to evaluate real estate development transactions.
Cap rate, which is equal to net operating income divided by the value of the property, is expressed as a percentage and used to value real estate. The lower the cap rate, the more highly valued a piece of real estate is, and the higher the cap rate, the less valued the real estate is. Price and cap rate move in inverse directions to each other, just like a bond. Learn more in our financial math course.
Financial Modeling Course
The best way to learn is by doing, and CFI’s real estate financial modeling course gives you the step-by-step instruction you need to build financial models on your own. It comes with both a blank template and a completed version, so you can easily build a model on your own or just go straight to the completed version. The high-quality video instruction will guide you every step of the way as you work through a case study for a townhouse real estate development project.
Thank you for reading CFI’s guide to Foundations of Real Estate Financial Modeling. To learn more about valuation, corporate finance, financial modeling, and more, we highly recommend these additional free CFI resources:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
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