Real Estate Investment, Finance and Appraisal
Appraisal tools
Real Estate Investment, Finance and Appraisal tests whether you can price a property as an investment and finance it prudently. Core tools are net present value, internal rate of return, payback, profitability index, cash-on-cash return and the capitalisation model. DCF requires explicit holding-period cash flows plus a terminal value, discounted at a rate matching the risk. The capitalisation rate approximates the discount rate minus growth; the mortgage constant drives debt service; gearing magnifies both equity return and default risk. Lenders test debt service cover and loan-to-value.
Rules that earn marks
- Use net operating income: gross rent less vacancy, collection loss, operating expenses and capital reserves.
- Be consistent: nominal cash flows with nominal discount rates, or real with real.
- Include acquisition costs, disposal costs and capital expenditure in the cash flow.
- IRR ranks projects poorly when scale or timing differ; use NPV for selection.
- Sensitivity-test rent, yield, void and exit value.
Worked example
Buy for ₦50m, receive ₦5m net rent for five years, sell for ₦65m at the end of year 5; discount rate 10%. PV of rent = 5m × 3.7908 = ₦18.95m. PV of sale = 65m × 0.6209 = ₦40.36m. Total PV = ₦59.31m; NPV = ₦9.31m, so accept. The reasoning: NPV measures value added after the 10% required return; an IRR above 10% gives the same signal for a single project.
Traps
Double counting growth by inflating rents and also lowering the cap rate; ignoring voids and management costs; ranking by IRR alone; using the loan rate as the discount rate; omitting exit costs.