The 8 Financial Keys to Real Estate Investing

 

The eight keys section involves a deep dive into core concepts that are used by every developer, across every real estate type irrespective of the development strategy employed, to structure a deal, evaluate its viability, and to describe the deal to investors and other financiers. These concepts are central to every deal an investor might see and so are considered the 8 keys that open every door in real estate.

Incorporating spreadsheet examples, this section is heavily oriented to financial analysis, and is broken down into varying levels of complexity to enable the student to learn complicated concepts at easy to understand levels as well as to see how they are applied by professionals.

The course, by name and nature, is split up into eight sections that, supported by spreadsheet walkthroughs, as follows:

1.Net Operating Income

Driving most financial concepts in evaluating a deal is the uppermost question of how much money will the deal make, and underpinning that idea is the net operating income for a project.In this section you will learn what it is exactly and how it is calculated so you can assess how profitable a deal is going to be and, by stress testing the assumptionsbehind the calculation, how robust is the sponsor’s financial model.

2.Capitalization Rate

While one of the most important calculations a sponsor can make to establish value of an asset during its entire lifecycle, the capitalization (cap) rate is often misunderstood.By clarifying exactly how it works, you will be able to identify inconsistences across deals and so be better equipped to properly compare opportunities you are looking at – no matter the asset class or investment strategy being employed.

3.Returns

Often the first thing you want to know, and last thing you want to be sure of, returns are the primary measure of how much you are going to make on a deal.This simple key concept can be, however, broadly defined and with little or no formal training that qualifies people to be developer/sponsors, there have emerged a range of ways in which ‘returns’ are defined in the industry.This section gives you the skills to be able to recognize all they ways in which you can be compensated for your investment dollars as well as the terminology that is used throughout the industry.

4.Equity Multiple

Relevant for gaining an overall picture of the extent to which your investment is projected to perform during the life of a deal, learning how equity multiple is calculated will help you to understand how to use it alongside other key concepts to gauge the overall opportunity from any given deal.

5.Internal Rate of Return

Undoubtedly one of the hardest concepts to understand because of its reliance on complicated financial formulae, this section breaks the internal rate of return (IRR) down into easy to understand components.Once you complete this section you will be able to calculate IRR for any deal, verify that a sponsor has correctly applied it, and use it to compare deals across real estate types and development strategies.

6.Preferred Return

Distinct from general return concepts that apply to the overall deal itself and how your investment will perform, in this section you will learn that the preferred return forms a key component to the enticement a sponsor is offering for your investment.You will learn how it is calculated, what it is usually paired with to drive the investment decision, and, importantly, how to confirm that there is consistency between pitch deck and contract.

7.Promote and Fees

Being a zero-sum game, investing in real estate means that any part of the profit that you get in return for your investment, the sponsor does not.In this section you will learn exactly how the sponsor is compensated for their time and effort, how so-called waterfalls work, and how to ensure that there is the all-important alignment-of-interest between you and the sponsor.

8.Leverage

The concept leverage speaks to your rights and responsibilities as it pertains to the capital stack.Employing groundbreaking teaching methodology, this section explains how important it is that you know where you stand in the capital stack relative to other investors and lenders, and how this can affect your best interests.You will also learn how leverage is used, for better and for worse, as well as some key metrics used by lenders/banks in assessing if a deal is creditworthy.