These descriptions highlight the three main strategies and the three main types of real estate financial modeling: On the other hand, a “Value-Added” deal where a firm acquires a property with a low occupancy rate, make significant renovations to improve it, and aims to sell the property for a significantly higher price might offer risk and potential returns closer to those of stocks.Īnd an “Opportunistic” deal where a firm develops a new property from the ground up (“development”) or completely converts or re-builds an existing one (“redevelopment”) might offer even higher risk than stocks, but also higher potential returns. Real estate combines elements of equities and fixed income and can offer a risk / potential return profile that is somewhere in between them.įor example, a Core real estate deal where a firm acquires a stabilized property, changes very little, and then re-sells it, might offer risk and potential returns closer to those of an investment-grade corporate bond. These are the questions that real estate private equity firms think about all day, and they spend significant time doing the analysis before making investment decisions. If you identify the most important assumptions and set up your analysis correctly, real estate financial modeling helps you answer these types of questions.Īll investing is probabilistic, so a simple model cannot tell you if a property will generate an 11.2% or 13.5% annualized return.īut a decent analysis can tell you whether or not that range of returns – 10% to 15% – is plausible. Or, if you develop a new office building by spending $100 million on the land and construction, and then you find tenants, lease out the property, and sell it, could you earn a 20% annualized return? In real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.įor example, if you acquire a “multifamily” property (i.e., an apartment building) for $50 million and hold it for 5 years, could you earn a 12% annualized return on your investment? The owners earn income from this rent, and they use part of it to pay for expenses such as utilities, property taxes, and insurance in some cases, tenants are responsible for portions of these expenses as well.Īll of this allows us to come up with the following definition of Real Estate Financial Modeling (aka REFM): In CRE, individuals or businesses, i.e., tenants, pay rent to property owners to use their space. We focus on commercial real estate (CRE) that is purchased and then rented out to individuals or businesses, as opposed to residential real estate, such as single-family homes, that is owner-occupied and not rented out to others. What’s the Point of Real Estate Financial Modeling?įirst, some definitions: we define “real estate” as land and buildings that generate revenue or have the potential to do so.
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We go into great depth in our full Real Estate Financial Modeling course, so I’m not going to attempt to replicate everything here. It can be nearly impossible to find one source that clearly explains the key points from start to finish. …which, ironically, makes it harder to understand. Get $100 when you resell Stella McCartney items at TheRealReal.When it comes to real estate financial modeling (REFM), there’s a ton of information out there… For a limited time, customers who resell Stella McCartney items on The RealReal will receive a $100 credit for joining the circular movement. The RealReal believes that the future of fashion is circular, so it encourages people to resell high-end fashion items. These models appear to be having a lot of fun dancing around furniture and in front of neon cat lights as they change into various Stella McCartney outfits.
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