Real Estate Financial Modeling: A Detailed Guide


Real estate financial modeling

Real estate financial modeling is one of the best methods you can use to solve your financial problems in the real estate industry. Recording all your financial dealings is a great way to manage your income. 

Simply put, real estate financial modeling uses a spreadsheet to record all the income and expenditures of the company. You will need the data when calculating how the company is performing.

Having the data on income and expenses will help calculate each decision’s effect in the future. And that’s why I have written this article to help give you all the information you need in building a financial model.

You need to understand cash flow projections, budgeting, and financial analysis. It would help if you created an accurate model for your assets and real estate transactions that can be used in projecting the value of the property and the net income or loss arising from the property.

What is a financial model?

A financial model is a put-together system that connects inputs and assumptions with periodic cash flow. The result of these relationships can be used to analyze an investment proposition and make any recommendations or decisions.

Financial models are mathematical models used to represent a company’s investment achievements better. They are used to recreate real economic issues from assumptions to make possible forecasts about the expected output.

Remember that these outputs are based on rates and presumptions from future forecasts. So, when computing this data, you must be careful not to input the wrong value. 

This is because any wrong input or financially incorrect input made will give you a bad result. Similarly, wrong inputs will give you a false impression and affect your investment decisions.

Some of the strategies to take note of when building a financial model for best results include:

  • Input only one formula per column
  • Don’t do hardcoding
  • Don’t use more than 4 IF functions keys

5 Factors that influence the assumptions in real estate modeling

The assumptions made when building real estate financial models are unique and different from other economic models. Certain factors influence these assumptions; the parameters are outlined below:

1. Rental yield

Before making any real estate financial model, you must calculate the rental yield. Rental yield is the amount of money a particular property should yield from the rent.

It’s important to calculate the rental yield so that when the expenses are removed, the net income can be calculated to determine the profit.

2. Vacancy factor

When a property is put out on lease, it’s not all the property that would be rented out always. So the lease contractor offers the tenant an option to opt out of the contract. This vacancy factor should be in the financial model.

When building the financial model, the modeler should consider the lease contract that permits tenants to pack out of the property at any point, so it doesn’t affect the model.

3. Loan-to-value ratio 

Before a bank gives out any loan to a firm, they would measure the property’s value. The property’s value is determined by dividing the loan amount by the total value of the property.

Loan AmountTotal value of property=Property’s Value

The model considers this value because the result symbolizes the debt incurred due to the loan. With the debt number, they can calculate the interest rate on loans and the repayment methods. 

4. Loan-to-cost ratio

Most times in real estate, investors prefer buying a new property and building it from scratch. So this means that they will value the property based on the project’s cost.

In this case, there is no market value to reference it to. And as such, the banks would divide the loan amount by the project’s cost. 

When there is no market value to reference:

Loan Amount Project’s Cost=Value Of The Property 

5. Amortization time

The periodic payment method will depend on the amortization period. If the prior amortization is smaller, regular payment will be higher and vice versa.

3 Types of real estate financial modeling

In the field of real estate, it’s a combination of the different fractions of equities and total revenue generated. The risk involved is quite lesser due to the model used.

1. High risk-return

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In real estate, if an already established property is acquired and it doesn’t appreciate or appreciate very little over time, and the owner wants to resell it will receive a higher risk-return. 

 2. Low-risk returns 

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But the same cannot be said for a property acquired with a lower tenancy rate, as the risk returns will be smaller. If the real estate firm renovates and sells it for an even higher price, the risk returns will be lower. 

3. Risk returns are higher than stocks

There is also a situation where the real estate firm builds a property from scratch or pulls down and rebuilds an existing building from scratch. This kind of scenario will also give more risk returns than stocks.

From the scenarios mentioned above, it is easy to understand the three basic types of real estate financial modeling, which we will be looking at below:

1. Real estate acquisition modeling

This type of modeling involves a firm procuring an already established property, doing little or no renovations to it, and finally reselling it.

2. Real estate renovation modeling

In this case, a firm procures properties, changes them entirely from beginning to end into a new property, and then sells it as a new property.

3. Real estate development modeling

Real estate development model develops a new structure from scratch; the real estate firm sources land and pays for it. Then builds an entirely new property, places the property for sale, and tenants buy.

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8 Main features of the real estate financial model

1. Input sheet

In the financial model templates, there is a feature known as “input sheets.” These sheets are carefully integrated into the templates of the economic model.

These inputs are structured such that when the figures are changed, they will reflect on the calculations and results. As a result, the same changes should be made to other relevant sheets when making any changes to the sheets.

2. New investment start-up summary sheet

The summary sheet lays out all the requirements for a new investment deal. It includes the terms and process of the whole agreement, which will be agreed upon by the firm and the investor.

The sheets are essential because this is where you clearly show what your income revenue looks like. It shows that the company is reliable and investors can trust you with their money.

3. Monthly income statement report sheet

Another type of sheet you will need in real estate models is the monthly income statement sheet. The monthly income statement contains all the income reports for the month. 

If you want regular updates and reports, you might want to go with the monthly statement pattern. The monthly income statement sheet is designed to show all the earnings breakdowns.

The statement contains all the breakdown analyses of gross and net earnings and comprehensive income analyses. This will determine whether the company is making progress or not.

4. Yearly income statement report sheet

Conversely, just like the monthly income statement, the annual statement also summarizes the company’s earnings. This report is done annually, usually at the end of the year.

The report gives a rundown of all the income generated and income spent. These include revenue generated, expenditures, and the cumulative expenses made by the management.  

The yearly income statement includes graphs, charts, earnings, margins, ratios, and tax deductibles. These representations will help the administrative board better grasp the whole report.

5. Balance sheet

The balance sheet can be termed a type of financial statement used to collate all company’s assets and liabilities, including the amount of equity attributable to the investors. The balance sheet calculates the returns to investors and the company’s income amount.

It helps you monitor your account to know what you own and owe. Also, you can use balance sheets and other financial statements to analyze your revenue and calculate the financial ratios properly.

6. Cash flow statement

This is another important financial statement to estimate and evaluate cash flow projections. Any business owner interested in monitoring the business income will employ the cash flow statement.

The cash flow statement shows how much the business has been able to generate over time. It also shows how much the company has if they want to apply for additional funding. 

The cash flow statement captures the company’s startup capital, annual income, debt, net operating income, etc. When these whole calculations are made, it would determine both the opening and closing balance and the progress made so far.

7. Investment evaluation table

The investment evaluation table will calculate all the company’s returns on investments. This is mainly associated with commercial real estate investment, including all the shareholders’ equity and company shares.

This forecast is important because it clearly shows how the company is performing. The investment evaluation will also show the rate at which the company spends cash.

8. Control panel

Having a simple user interface with great graphics will help people to navigate the control panel easily. In the dashboard or control panel, you will see all the needed information to help you navigate the model.

The graphical representation of the features will facilitate comprehension rate and help you to locate your financial statements and activities easily. This will enable you to keep track of cash flows, sales expenditures, and net revenue.

5 Benefits of financial modeling for your real estate business

1. Monitor the performance of the company

Financial modeling will help you analyze the performance of the business because you will be dealing with facts and figures rather than doing guesswork.

The real estate financial model excel analysis gives more simplified financial statements. It is so easy to understand that anyone across it can comprehend and make logical deductions from the account by merely looking at the numbers.

For instance, looking at the company’s net profit margin and how it balances income and expenditures, one can easily deduce its performance without flipping through the whole account statement.

2. Sets the company up for success

Real estate modeling will lay out all your company’s activities in numbers and make them easy to comprehend. It gives better-informed information on the path the company is towing in the future.

Planning your company’s finances sets you on a success story and facilitates success because you can see everything. By doing so, you can make wise investment decisions using the right tools to value the company.

3. Attracts investors and banks

The real estate financial model gives a factual and simple representation of the performance survey chart. It helps the prospective to see the actual worth of the company.

Also, a clear representation of the company’s assets would help them secure loans from the bank. And if investors are interested in the company, they already know what the company is worth before deciding on a joint venture.

4. Gives real financial precepts

Based on how the real estate financial models work, it is designed with plausible and real-life economic precepts that are easily relatable. The assumptions are well laid out to give a clear-cut projection.

With a financial model, you can choose the option you want, whether to go with inputs or assumptions. 

5. Well-structured

The financial model inputs and estimations are structured, giving a financially correct result at the end of the day. If there is a change in the main sheet, it will affect other sheets likewise.

It is also structured to provide clear information on all the quantitative outcomes. Hence the use of graphs and charts to represent the whole statement rather than boring the reader with the nitty-gritty of the entire financial model.

The financial modeling course

A great way to get started in real estate financial modeling is to work and do it. You will need a financial modeling course that will be your step-by-step guide to help you build your very first economic model. 

The financial modeling course is a complete course where you will be taught all you need to know. Learning the system is relatively easy because it contains self-explanatory videos and lessons.

The course has several templates you can use to build your own if you want, or you can use the already-made ones. 

Final thoughts 

As seen from this article, the best way to know the financing for your real estate project is to build a detailed financial model. It’s important because you must be on the right track for your project.

If you fail to have a financial model, it will affect your real estate projects. You might spend hundreds, if not thousands, of dollars in financing costs. 

You can explore many real estate financial modeling ideas and information today. Having a financial model will give you better financing ideas and save you the stress of financing through loans.  

And professionals are trained whenever you feel like you can’t handle this on your own. They will help you through the whole process and get you the best real estate finance structure you need.


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