Finance Tools: Know the money and terminology first! Save yourself heartache and frustration by getting to know the language of real estate buying and selling. If you do things will look clearer and you will see the pitfalls before they see you!
Orlando homes investment tools are used by residential and commercial real estate investors to help analyse property to see whether or not it’s worth investing in. Here is a list of financial tools, that you can use to manage properties and investments more effectively.
Financial real estate investment tools and methods:
These financial tools and methods for real estate investment will help protect your property investment and capital, and assist you in making informed investment decisions.
- 1. Cash flow pro forma.
Cash flow projection is the first thing investors look at when considering any potential real estate investment property. A real estate pro forma allows you to evaluate the overall profitability of a property, taking into account the revenue, potential gross profit, effective gross profit, operating expenses, total expenses, net operating income, and adjusted net operating income.
- 2. Discounted cash flow method (DCF).
A DCF is a method of valuing all financial assets, including commercial real estate. It works on this basic principle: money has more value right now than it will in the future.2 Similarly, the value of an asset is essentially the value of all future cash flows that are discounted for risk.
- 3. Net present value rule.
This is used to calculate the present value of your net future cash flows from investments in real estate property. To calculate the net present value of future cash flows, discount all future cash flows by the desired rate of return, and then deduct that value from the initial cash or capital investment amount.
- 4. WACC formula.
The weighted average cost of capital (WACC) quantifies debt risk. It’s the weighted average of all financial loan sources used to fund an investment, or the cost of the investment’s capital – both debt and equity. The WACC formula is: GetSmarter Blog Image The WACC formula can be used to determine the debt risk of investments you’re considering. You should be cautious of deals that have loan-to-value ratios above 75 per cent.