Study of a Practical Method for Real Estate Investment Risk Decision Making

With the rapid development of the real estate industry in China, the risks carried in them are being concerned greatly. In the real estate investment decision making, it is not only needed to consider profits but also to predict the risk accurately. The risks in a real estate development project were firstly analyzed. Then based on the traditional cash flow analysis, a practical method for the real estate project financial risk analysis was developed. The monetary value, specifically the expectation and the standard deviation of the Net Present Value were employed as the final evaluation criteria for the selection of multiple development plans. A case study was conducted to test and validate the model, including identification of risk variables, estimation of cash flow, probability distribution of the risk variable and the calculated value of NPV, and the analysis of the simulation outcome. The results showed that it is feasible to build a practical method for the risk-based decision making of a real estate investment. The proposed model and the system in this paper could be used to predict the level of financial risk of a real estate investment effectively and be helpful to better control the risk for the decision maker.