Interest Expense

Interest Expense: In the context of real estate and finance, interest expense refers to the cost of borrowed capital that accrues over time. It is essentially the cost paid by a borrower to a lender for the use of their money.

In real estate, interest expense can be one of the most significant expenses associated with property ownership, particularly for properties that are financed with debt. It is typically calculated by multiplying the outstanding loan balance by the annual interest rate, then dividing by the number of periods in the year (usually 12 for monthly payments).

In real estate financial modeling, interest expense can significantly affect net income and cash flows, and thus impact key metrics such as Net Operating Income (NOI), cash-on-cash returns, and Internal Rate of Return (IRR).

Interest expense is also important for tax purposes, as it is generally tax-deductible for the purpose of calculating taxable income, which can provide significant tax benefits to property owners. However, the exact tax treatment of interest expense can depend on various factors, including the tax laws in the relevant jurisdiction and the specific circumstances of the taxpayer.