Week 01 Introduction To Real Estate Finance

Week 01
Introduction to
Real Estate Finance
by Jonathan F. Caro, REB
Week 01: Introduction to Real Estate Finance
At the end of this module you are expected to :
1. Identify and understand the market sources to secure and generate financial returns
from real estate assets.
2. Understand how the real estate development process works that make up the entire
real estate life cycle.
3. Understand how to relate the real estate life cycle to sources of financial returns of real
estate assets.
SOURCES OF FINANCIAL RETURNS FROM

REAL ESTATE
Sources of Financial Returns from Real Estate
1. Cash Flow
• Resulting financial return from rentals or from the sale of an owned
property asset.
• Main objective in real estate – to generate POSITIVE CASH FLOW

RETURNS from passive income derived from its utilization or sale of a real
estate asset
2. Property Appreciation
• Real estate properties established a general trend of appreciation unlike
other tangible assets, resulting to an increase in its value over time.
• Appreciation of real estate assets is result of inflation and dynamics of

market supply and demand elements in local economy where property is
located, with correlated impact from general economy – both within
country and global environment
3. Leverage from Mortgage Financing

• Property owners normally secure financing assistance from banks and financial
institutions to acquire real estate properties. Primarily due to usual inability of
such buyers to pay whole purchase price of identified property thru their own
cash.
• Securing loan from a bank or financial institution requires property to be made

as collateral for lending institution in order for latter to guard against possible
non-payment of loan.
• For buyer securing financing, loan makes possible the acquisition of property by
buyer which allows buyer to realize cash flow that can be generated by subject
property.
4. Tax Incentives
• Owning real estate properties allows certain expenses related to such
ownership to be deducted from computed income tax of property owner.
These are :
i. Depreciation
ii. Mortgage interest payments
iii. Expenses related to the operations, maintenance and repairs of the
property and building improvements on it
• Special government incentives allow property owners to realize lower tax

rates due to area’s objective to increase area’s economic output and
productivity
REAL ESTATE DEVELOPMENT CYCLE

Real Estate Development Cycle

1. Development Opportunity
• Real estate development starts with the identification of a market need by a lot
owner, investor, or developer
• This identified demand coming from a certain segment of the real estate market can
be addressed by using a property on an as-is basis or be developed
• The lot owner, investor, or developer then starts to plan HOW to cater to that market
demand since addressing this will lead to a profitable use of the property
2. Project Feasibility
• The lot owner, investor, or developer starts to ask the following questions :
a) What does the market want that can be addressed by my property?
b) What kind of costs do I have to spend to produce the product that will adress
the market demand?
c) What price do I offer it to make it profitable?
d) Can the the market, project identified for it, and its profitability be realized
within an acceptable level of investment, time, and work?
• The project feasibility intends to answer all questions. If yes, then the project
proceeds.
3. Design Development
• If the property needs to be improved beyond its original state of being undeveloped,
then a design has to be made for the product that the market demand will cater to
• Architects are engaged to maximize the use of the property following the demands
of the market
4. Construction and Project Mgt.

• Once the design of the project is completed, then the design plans are followed to
construct the identified product on the property
• Construction is usually assigned to a third party group that has experience on this
field. Managing the construction is separately handled by either the lot owner, the
developer, or investor, or a separate third party engaged by the project proponent
depending on the complexity of the intended project.
5. Sales, Leasing, & Marketing

• The lot owner, developer, or investor then proceeds with marketing the property for
the identified market
• Depending on the market need and the objectives of the project proponent, the
product can either be sold or leased
6. Operations and Property Mgt.

• In the event that the property is sold, then the new property owner proceeds to
operate it as intended. Such an outcome results to the project proponent achieving
their objective of earning a profit from its sale or lease
• Property management involves the proper maintenance of the subject property to

maximize its usability and extend its usable life to as reasonable and practical as
possible. Such extension may necessarily involve a renovation/redevelopment that
creates and starts a new real estate development cycle again.
Review Guide Questions and Reflection Points

Following are this module’s Review Guide Questions and Reflection Points. Students are
highly encouraged to post answer in the Discussion Board :
1. What are the four sources of financial returns from real estate properties? What kind of
opportunities in real estate in the Philippines can you see getting yourself involved in
based on the type of returns you expect?
2. What is the most source of financial returns in real estate you are most familiar with?
How does such financial returns help grow the local economy in general, and to the
property owners, in particular?
3. How can you relate the real estate development cycle to your life? What kind of skills do
you have that allows you to be part of such a development cycle?
Review Guide Questions and Reflection Points

4. How do you think the real estate cycle in the Philippines be affected by the global
pandemic?
5. What are major challenges you see in real estate development currently being faced in
the Philippines, excluding the impact of the global pandemic?
The powerpoint lecture file may be downloaded in pdf format and these shall serve as your notes and reference.
You may not share or use any part of every material found in this module other than for your own personal and
academic purpose.
References:
Online Supplementary Reading Materials
1. What is Cash Flow? From www.Mashvisor.com, 2020 :
https://www.mashvisor.com/blog/what-is-cash-flow/
2. How does a Mortgage Affect Real Estate Investor’s Returns? From www.Realized.com, 2016 :
https://www.realized1031.com/blog/how-does-a-mortgage-affect-real-estate-investor-returns
3. Real Estate Finance and Investments 14th Edition, William B. Brueggeman and Jeffrey D. Fisher, 2011 :
https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxpbmZvZm5ianV8Z3g
6MTY5NWFhNTM3NWViM2E2Yw
4. The Complete Guide to Real Estate Finance for Investment Properties, Steve Burges, 2016 :
http://cdn2.media.zp-cdn.com/21275/Steve_Berges_-
_Complete_Guide_to_Real_Estate_Finance_for_Investment_Properties-52a7ef.pdf

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Week 01

At the end of this module you are expected to :

SOURCES OF FINANCIAL RETURNS FROM

Sources of Financial Returns from Real Estate

• Main objective in real estate – to generate POSITIVE CASH FLOW

Sources of Financial Returns from Real Estate

• Appreciation of real estate assets is result of inflation and dynamics of

Sources of Financial Returns from Real Estate

3. Leverage from Mortgage Financing

• Securing loan from a bank or financial institution requires property to be made

Sources of Financial Returns from Real Estate

• Special government incentives allow property owners to realize lower tax

REAL ESTATE DEVELOPMENT CYCLE

Real Estate Development Cycle

Real Estate Development Cycle

Real Estate Development Cycle

Real Estate Development Cycle

Real Estate Development Cycle

4. Construction and Project Mgt.

Real Estate Development Cycle

5. Sales, Leasing, & Marketing

Real Estate Development Cycle

6. Operations and Property Mgt.

• Property management involves the proper maintenance of the subject property to

Review Guide Questions and Reflection Points

Review Guide Questions and Reflection Points

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