Financial Modeling Fundamentals

Jan 20, 2025

What are the fundamentals of financial modeling for commercial real estate?  It boils down to three core components:

  1.  Investment Cash Flows – Capital outflows such as acquisition, development, and value-add costs, including closing costs


  2. Operating Cash Flows – The cash flow from the property operations, which is net operating income


  3. Reversion Cash Flows – Capital inflow when the property is sold including closing costs

When debt is involved, these cash flows will then go into either:

  • Unlevered Cash Flow – The net cash inflow and outflows before taking into account financing


  • Levered Cash Flow – The net cash inflow and outflows, including financing

Once you understand the cash inflows, outflows, and the time periods they occur in, you can analyze more complex deals that may require a financial model with monthly periods such as value-add or development deals. 

A good financial model will create a clear picture of a deal’s risks and returns.  By analyzing these different cash flow types, we can calculate return metrics such as internal rate of return (IRR) or cash-on-cash return.