Beginner RE Valuation/Modeling

I'm new to RE and want to transition to Capital Markets eventually just out of interest (probably more interested in debt/equity placement but open to investment sales also)

I'm pretty familiar with traditional modeling (3-statement projection, DCF) but having trouble finding free resources for real estate modeling. I had a few questions that were a bit confusing so I would appreciate any help!

So I understand the process for calculating NOI. In commercial real estate, is NOI considered the same as CF? How is NOI/CF projected when doing DCF? Is it based on the monthly lease payments or is there even a "projection" like a traditional model (i.e. average revenue growth)? For cost items, how are those projected (% of income?)

Then, do we use NOI as the CF in a DCF model?

Thank you so much for your help!

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Comments (3)

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Mar 22, 2019 - 10:27pm

First, hat off to you for being interested in something other than "hey how do I exit into a REPE acquisition / dev role for a big NY firm???". Lot of really cool sides of this business that can make good money and be a lot of fun.. your question on CF/NOI

Granted every sector is different...Retail/office if you have a gross lease you have your recoveries...residential will have loss to often are the most different and focus heavily on food and bev, etc. Below is a lot more detail...but simply and most often, you take PROPERTY REVENUES minus PROPERTY EXPENSES to = NET OPERATING INCOME. Then you subtract DEBT SERVICE to get CASH FLOW AFTER DEBT. Then, depending on your company platform, it could go a multitude of different ways...most complicated and important for a public company and GAAP related items. But most PE firms focus on those 4 line items, and all the details that go into it from an asset management point of view.

+ Gross Potential Revenue (maximum rent the property can collect assuming 100% occupied at current rates)
- Vacancy Loss (deduct the loss of revenue caused by vacant units)
- Loss to lease for resi / concessions for resi/office/retail...some people group all of these into vacancy for ease of modelling
- bad debt expense
+ other income (termination fees, pet fee revenue, utility fee income, etc ...anything that doesnt fit the above)
+ Tenant CAM recoveries (only for office/ for explanation)

- Utilities
- Insurance
- Repairs and MAintenance
- Grounds and Landscaping
- MArketing
- Property Management Fees
- PAyroll
- Admin
- Real Estate TAxes
- Turnover
- Other Expenses
- CAM charges (only for office/ as mentioned above)


  • CAPITAL EXPENSE RESERVE (this is typically a $/unit or $/sf amount that is reserved for capital maintenance items...required by lenders...some net this out of NOI...others like to look at NOI without capex...then NOI after capex. Personally, I will always want to look at yield or any NOI metric AFTER cap ex reserves)

= NOI (after capex)



-NON OPERATING ACTIVITY: this is really pointless in RE, as net income is a metric no one SHOULD really care about, to be honest...public REITs will care about some of these as they move from Net Income to FFO/MFFO..but that's about it. BUT, the main ones are depreciation/amortization and gain/loss of capital events...
- depreciation
- amortization
- gain/loss on sale
- gain/loss on debt retirement
- other items that are really dependant on your company and their platform (interest income, contra accounts for capital, lot of public GAAP accounting items, etc.)


Mar 22, 2019 - 10:35pm

Sorry I thought I should point the basics for NOI and CF...because you said you knew the difference between the two but then it seemed like there was some confusion between the two. So regarding your point about NPV/DCF...

Regarding DCF, it's hard to answer your question. If you are trying to VALUE A PROPERTY or an opportunity...the most common way is to project out your NOI less capex...and assume some type of sale value at the end of that period. Apply your discount rate, etc etc etc. Regarding your point of projection...most often you will have a budget in place for the current year...and then grow each non formulaic line item by a growth % (most common is 3% or some type of CPI projection). Then you will have other more specific scenarios that include leverage, asset management fees, etc...Just deduct/add from your NOI, following the income statement structure described above, using the aforementioned projection %'s.

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