Homburg Institute
Program: Real Estate Development, and Project and Construction Management
2021 | Instructor-Led Program |


Real Estate Finance

Course ID: REFN0104

Category: Business

This course provides participants with an advanced knowledge and understanding, appropriate to the Real Estate Finance course

self-taught course
Duration: 10 Hours




Course Summary

This course provides participants with an advanced knowledge and understanding, appropriate to the Real Estate Finance course; it looks at the theory and practice of finance for investment in commercial real estate and the design and pricing of different mortgage instruments.  It looks at commercial mortgages and residential mortgage product, the secondary mortgage market as well as the structure and valuation of mortgage-backed securities.

Course Rationale

A thorough understanding of and ability to work with finance and financial markets and instruments is critical in the management of real estate.  Particularly, learners must understand:  the Financial Analysis of Real Estate, Debt Financing, Effects of Leverage, Valuation Process, Different Forms of Capital, and Understanding of the Real Estate Market.

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About the instructor
Tom Geurts

Dr. Tom Geurts


Professor Tom Geurts, of George Washington University, holds a PhD in Real Estate and Finance from Pennsylvania State University (1998); an M.S., Economics, University of Amsterdam (1991); an M ...

View other courses from Dr. Tom Geurts


Lecture 1: Real Estate Market Overview - Viewing Real Estate

In this introductory lecture I will provide a general overview of real estate as an asset. This will help the student to better understand the asset that is being financed and the market in which it operates. Specific topics:

  • The definition of Real Estate
  • Discussion of Price versus Value
  • Unique characteristics of Real Estate
  • Real Estate as an Investment Opportunity

Lecture 2: Pro Forma Introduction

Now that we have defined Real Estate and understand its unique characteristics, this lecture looks at the cash flows that are being generated and these are put in a so-called Pro Forma. Specific topics:

  • How to create an excel spreadsheet containing the Pro Forma
  • Yearly Income Statement
  • How to account for Capital Improvements
  • The impact of Depreciation on Taxes
  • Discussion of different types of Rental Income and Rent Increases over time
  • Discussion of how to account for Operating Expenses
  • The Expense Stop

Lecture 3: Discounted Cash Flow (DCF) - Valuation

Now that the pro forma has been created we can put the resulting cash flows from the pro forma into a discounted cash flow model to value the property. This is needed so the debt provider knows the value of the asset for which it is providing financing and which serves as collateral. Specific topics:

  • The CAP Rate Method
  • Real Estate Decision Analysis
  • Net Present Value
  • Internal Reate of Return

Lecture 4: Interest Rates

This lecture continues where the previous lecture ended by continuing the discussion of the Net Present Value and its input variables, such as the interest rate on debt for the Weighted Average Cost of Capital. The emphasis of this lecture is on estimating the riskiness associated with the investment, something that especially the debt financing providers are concerned about. Subsequently the students will be introduced to financing alternatives and their cost of capital. Specific topics:

  • The Net Present Value (continued)
  • The Rationale behind Partitioning the IRR
  • The Internal Rate of Return (continued)
  • Financing Alternatives and Cost of Capital
  • Leverage
  • Change in Interest Rate due to change in Risk associated with the Investment
  • The Hamada Equation
  • Mezzanine Debt  

Lecture 5: Risk/Return Portfolio

This lecture provides insight into how to define and calculate risk and return and how creating a portfolio impacts risk and return. Specific topics:

  • What is Investment Risk
  • Risk and Return Tradeoff
  • The State of the Economy Table
  • Calculating the Expected Rate of Return
  • Calculating the Standard Deviation as a measure of Risk
  • Real Estate is Different
  • Creating a well-diversified Portfolio by including Real Estate
  • Calculating the Correlation Coefficient

Lecture 6: Debt Financing, including Fixed & Variable Rate Mortgages

This lecture discusses Debt Financing from the viewpoint of the lender and borrower. Both parties have options with respect to lending and borrowing capital and both parties make decisions based on the risk they face and the potential for returns. Specific topics:

  • Risk associated with Debt Financing, both for a Lender and a Borrower
  • Leverage as a “Double Edged Sword”
  • The Impact of Taxes on using Debt Financing 
  • Historical Cost of Financing versus Current Cost of Financing 
  • Using Mortgages versus Bonds for Debt Financing
  • Fixed versus Variable Rates

Lecture 7: Valuing Income Producing Properties

In order to underwrite the loans that capital providers will extend to the borrower, they will try to estimate the value of real estate that is used as the collateral for the financing. This lecture gives an overview of the process of valuation, in particular the benefits and drawbacks of the various valuation methods, and for which types of real estate the various valuation methods are best suited. Specific topics:

  • Sales Comparison Approach
  • Cost Approach
  • Income Approach
  • Regression Analysis
  • Valuation from the Debt Holders’ Perspective versus the Equity Holders’ Perspective

Lecture 8: Optimal Capital Structure

This lecture introduces in detail the WACC, which stands for the Weighted Average Cost of Capital. It is calculated using the amounts of Debt, Preferred Stock, and Equity used for financing a real estate investment combined with their cost or yield. Please note that there are references in this lecture to calculations, which you can ignore. You need to understand the calculation, importance, and usage of the various WACCs, with the weights and cost or yield as inputs. This results in a discussion of the optimal capital structure, which minimizes the cost of capital. The latter is considered the Hurdle Rate for investment decision-making. Specific Topics:

  • Calculation of the WACC
  • Understanding the Difference between WACC1 and WACC2
  • The Difference between using Retained Earnings and Issuing New Equity 
  • The Marginal Cost of Capital 
  • Discussion of the Capital Budget 
  • Calculating the Break Point
  • The Blended WACC
  • The Hurdle Rate
  • The Leverage Effect (again)
  •  The Signaling Function of Issuing Debt and Equity

Lecture 9: Additional Funds Needed

This lecture provides an in-detail discussion of calculating the Additional Funds Needed (AFN), which consists of the capital needed to buy a building plus the initial Working Capital. The formula for AFN is developed step-by-step. Specific Topics:

  • The Importance of Financing Working Capital
  • Forecasting new Rental income
  • Increase in Required Assets
  • Calculating the Capacity Rental Income
  • Real Estate as a “Lumpy Asset”
  • The AFN Formula
  • Implications of AFN 
  • Relevant Cash Flows

Lecture 10: Hybrid Financing, with Warrants and Options

This lecture shows two ways a firm can further lower their WACC, namely by using Hybrid Financing. Hybrid Financing comes in two forms, namely a Bond with Warrants and a Convertible Bond. Both will be discussed in detail to show how they impact the WACC and profitability of Real Estate Investments. Specific Topics:

  • Explanation of a Call Option and Warrant
  • The Impact of the Warrant on the Interest Rate on Debt and the WACC
  • Calculating the Rd of a Bond with Warrants
  • The Impact of the Pricing of Warrants
  • Summary of the Benefits and Costs of Issuing Debt with Warrants
  • Calculating the Rd of a Convertible Bond
  • Calculating the Convertibility Value
  • Analyzing the Risk of a Convertible Bond
This course includes
  • 10 hours on-demand lectures
  • 365 day access
  • Mobile access
Free Real Estate Finance and Investment Courses

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