Stop the Confusion, Real Estate Financial Investing Terms Broken Down
—— May 10, 2021Challenges in real estate investment in Lagos or beyond can be frustrating. This blog post addresses some of these challenges, faced by both new and experienced real estate investors, and will hopefully help you own your dream home in Lagos.
As property developers in Lagos, we have come to realize that most of the people we speak to have a tendency to get frustrated with all the “big” words, jargon and abbreviations as well as the terms used in real estate transactions. However, there are some real estate terms you should know!
This post highlights some of the more important investment terminology used in real estate transactions with regards to appraisals, what they mean and how they are used in the financial sector of our business, which in return will help you feel more comfortable with the process of real estate investments.
A small disclaimer, this post is a very brief explanation and is in no way a definitive guide on financial terms and challenges faced in this industry. Please speak with us at Beachway Homes on any specific topics about your specific situation.
In this post we will be addressing real estate appraisals and all its terminology.
What is an appraisal?
An Appraisal is the analysis of the viability of a project, and has some models attached to it to accomplish this. DCF or Discounted Cash Flow, Payback Period and Return on Capital Employed or ROCE are the more complex models used for Appraisal.
Real Estate Appraisal Terminology Explained
Discounted Cash Flow (DCF)
(The Discounted Cash Flow, also known as DCF, is the Appraisal technique used that discounts all periodic cash outflows and inflows, at a specific discounted rate versus their present value.
Present Value
The Present Value is the sum of the discounted cash flows.
Internal Rate of Return
The internal rate of return is the discount rate that equates the NPV to zero. When a project has an NPV that is positive or above a certain benchmark and the Internal Rate of Return (IRR) is above a certain cut-off percent, then the project is viable.
Discount Rate
The Discount Rate is the rate of return to discount cash flows. This is commonly referred to as the Weighted Average Cost of Capital (WACC) or Total Return (Rental Yield plus Capital Growth). Specifically in Nigeria, the WACC rate used is typically the sum of the lending rate plus a premium to cater for risks and the developer’s profit.
When buying real estate, terminology can be overwhelming especially when referring to financial investment terms. This article on Wikipedia has more detailed information about real estate appraisals worth reading.
At Beachway Homes we specialise in guiding you through all the buying process, from finding your perfect home or property investment in Lagos to going through all the transaction details, and helping you understand all the real estate investment terms and jargon that goes with it.
Research and information provided by Kolapo A. Daniyan