What are the key assumptions and inputs for your cash flow projection for real estate development?

1 Project Timeline

The first input you need for your cash flow projection is the project timeline, which defines the start and end dates of each phase of the development, such as acquisition, design, permitting, construction, leasing, and sale. The project timeline affects the timing and amount of your revenues and expenses, as well as your financing needs and costs. You should base your project timeline on realistic market conditions, historical data, and professional advice.

2 Revenue Sources

The next input you need for your cash flow projection is the revenue sources, which are the ways you will generate income from your development. Depending on your project type and strategy, your revenue sources may include rental income, sale proceeds, tax credits, grants, or other incentives. You should estimate your revenue sources based on market research, comparable projects, and contractual agreements. You should also account for vacancy, collection losses, and concessions that may reduce your actual revenues.

3 Expense Items

The third input you need for your cash flow projection is the expense items, which are the costs you will incur to develop and operate your project. Your expense items may include land acquisition, site preparation, design and engineering, permitting and fees, construction, marketing, leasing, property management, maintenance, utilities, taxes, insurance, and debt service. You should estimate your expense items based on historical data, bids, quotes, contracts, and industry standards. You should also account for contingencies, inflation, and escalation that may increase your actual expenses.

4 Financing Terms

The fourth input you need for your cash flow projection is the financing terms, which are the conditions and costs of your debt and equity sources. Your financing terms may include interest rates, loan fees, loan-to-cost ratios, loan-to-value ratios, debt service coverage ratios, amortization periods, maturity dates, prepayment penalties, equity contributions, preferred returns, profit splits, and exit strategies. You should negotiate your financing terms based on your project risk, return, and cash flow profile.

5 Cash Flow Metrics

The fifth input you need for your cash flow projection is the cash flow metrics, which are the indicators of your project performance and profitability. Your cash flow metrics may include net operating income, net cash flow, cash-on-cash return, internal rate of return, equity multiple, net present value, and profit margin. You should calculate your cash flow metrics based on your cash flow projection and your investment criteria. You should also compare your cash flow metrics with your market benchmarks and your competitors.

6 Sensitivity Analysis

The sixth input you need for your cash flow projection is the sensitivity analysis, which is the process of testing how your cash flow projection changes when you vary one or more of your assumptions or inputs. Sensitivity analysis helps you identify the key drivers of your project success and failure, as well as the potential risks and opportunities. You should perform sensitivity analysis on your revenue sources, expense items, financing terms, and cash flow metrics, and evaluate the impact of different scenarios on your project outcomes.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?