Real estate development and investment is capital intensive and cash flow dependent. The sources of capital needed for a project may vary based on size, complexity, location, and type however most real estate is funded or refinanced with some amount of debt due to the benefits to the borrower. Most investors or developers chose to borrow money for various reasons including:
- The investor/developer does not have enough available cash to pay for an investment in full and thus requires an outside lender
- Debt financing makes investments possible that might not be otherwise be possible.
- A broader investment strategy allowing for retained equity/capital for other projects allowing for diversified projects
- The effect on expected return on equity
- Tax deductibility of interest enhancing after tax returns
The lender will provide the loan based on the belief the borrower will repay the loan and keep all payments of principal and interest current. Understanding and analyzing the metrics used by the lender will provide better insight with any initial underwriting and analysis of any property to determine if the property is “finance-able”.
This document will explain the basic calculations of the payment of a loan including the principal and interest portions. A guide on preparing a loan amortization schedule in Microsoft Excel is also included.
Loan Basics & Preparing an Amortization Schedule 07152017