Real Estate Finance

Question 1

Time Value of Money (TVM)

Answer 1

The concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.

Question 2

Interest

Answer 2

A fee paid for borrowing another party’s money. Interest can be either simple or compounded.

Question 3

Opportunity Cost

Answer 3

The benefits an individual, investor or business misses out on when choosing one alternative over another

Question 4

Sources and Uses

Answer 4

A sources and uses analysis provides a summary of where the capital used to fund an acquisition will come from (the sources) and what this capital will purchase (the uses). The sources and the uses must equal each other.

Question 5

Uses

Answer 5

The most common Uses to start with are purchase price, hard costs, and soft costs.

The Uses section is derived before the Sources section and dictates how much funding is needed.

Question 6

Acquisition Cost

Answer 6

An acquisition cost, also referred to as the cost of acquisition, is the total cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures but before sales taxes.

Question 7

Acquisition Cost

Answer 7

The total cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures but before sales taxes.

Question 8

Hard Costs

Answer 8

Refers to any costs associated with the physical construction of the building. Hard costs can be related to the building’s structure, the site and to the landscape. All labor and materials required for construction are included in hard costs. AKA “brick-and-mortar costs”

Question 9

Soft Costs

Answer 9

Any costs that are not considered direct construction costs. Soft costs include everything from architectural and engineering fees, to legal fees, pre- and post-construction expenses, permits and taxes, insurance, etc. Others include purchase closing costs, leasing commissions, loan acquisition costs, and reserves.

Question 10

Purchase Price

Answer 10

The price an investor pays for an investment, and the price becomes the investor’s cost basis for calculating gain or loss when selling the investment.

Question 11

Appraisal

Answer 11

A valuation of property, such as real estate, by the estimate of an authorized person

Question 12

Simple Interest

Answer 12

Based on the principal amount of a loan or deposit.

Question 13

Compounded Interest

Answer 13

Based on the principal amount and the interest that accumulates on it in every period.

Question 14

Qualified Rehabilitation Expenditures (QREs)

Answer 14

QREs are costs incurred for the renovation of a building that would be depreciable under IRC Section 168 (e.g. construction costs, architect’s fees, engineering fees, and related costs). Any amount properly chargeable to capital account

Question 15

Sitework

Answer 15

A part of a construction project that is not part of a building or house’s physical structure. This usually includes grading, excavation, construction and installation of septic tanks and filtration systems, driveways and other utilities.

Question 16

Hurdle Rate

Answer 16

The minimum rate of return required by a investor on a project or investment.

Question 17

Cash Flow

Answer 17

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow.

Question 18

Reversion Cash Flow

Answer 18

Net proceeds made from the resale of a project or investment.

Question 19

Free Cash Flow (FCF)

Answer 19

The cash a company generates after cash outflows to support operations and maintain its capital assets.

Question 20

Internal Rate of Return (IRR)

Answer 20

A metric used in capital budgeting to estimate the profitability of potential investments.

Question 21

Present Value (PV)

Answer 21

The current value of a future sum of money or stream of cash flows given a specified rate of return.

You can use the PV function in Excel to get the value in today’s dollars of a series of future payments, assuming periodic, constant payments and a constant interest rate.

Question 22

Amortization

Answer 22

The process of paying off debt over time in regular installments of interest and principal sufficient to repay the loan in full by its maturity date.

Question 23

Future Value (FV)

Answer 23

The value of a current asset at a specified date in the future based on an assumed rate of growth.

You can use the FV function in Excel to get the future value of an investment assuming periodic, constant payments with a constant interest rate.

Question 24

Real Estate Valuation Methods

Answer 24

1. Cost Approach
2. Income Approach
3. Comps Approach

Question 25

Direct Capitalization Method (Direct Cap)

Answer 25

A process where a property’s stabilized net operating income (NOI) is divided by the market capitalization rate to estimate it’s value

Net Operating Income/Cap Rate = Value

Question 26

Capitalization Rate

Answer 26

The percentage return an investor would receive on an all cash purchase.

Question 27

NPER

Answer 27

Use the NPER function to get the number of payment periods for a loan.

Question 28

Net Present Value (NPV)

Answer 28

The difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used to analyze the profitability of a projected investment or project.