Real Estate Analysis

Overview

Real Estate Analysis can mean different things. First there is the real estate as an asset in and of itself. Then there are loans that issued to fund real estate development or purchase. Lastly, real estate loans can be bundled together into a structured instrument.

Real Estate Asset Modeling

Real estate as an asset is very similar to a loan or bond, in that it generates a series of cash flows at fairly regular dates. For example, an apartment may charge a fixed rent every month. That means that real estate can be modeled with the same sorts of tools that are used to valuate cash flows in fixed income.

However, the payments are not entirely fixed. At times, the owner may decide to increase the rent. In addition, the renter may leave at some point, leaving the aparment unoccupied. Additional expenses that are required for the update of the real estate are required to maintain the real estate value and are unpredictable.

In addition, real estate is generally an illiquid asset, which means that it takes time and effort to be able to sell at a reasonable price. This illiquidity adds a complication to valuation, as a fair price for an asset may not be the same price that one could get in the market within a specified time period.

Present Value Methodologies

When running a present value analysis of real estate, the first step is decide whether to model the real estate cash flows as being perpetual, or as being a finite number with a lump sum payment at the end. In theory, these two methods are equivalent.

Adding Statistical Aspects