Stop the Confusion, Financial Investment Lingo Broken Down—— February 13, 2020
Research and information provided by Kolapo A. Daniyan
Challenges in real estate investmenting can be frustrating, and this blog post addresses some of these challenges and will hopefully help you own your dream home in Lagos. In our line of work, we have come to realise 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.
This series of posts highlights some of the more important terms, 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 terms and challenges faced in this industry, please speak with us at Beachway Developers on any specific topics about your situation.
In this post we will be addressing Appraisals
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.
(DCF) or Discounted Cash Flow is the Appraisal technique used that discounts all periodic cash outflows and inflows, at a specific discounted rate versus their present value. The sum of the discounted cash flows is the present value. 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.
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.
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