How to Use a Real Estate Investment Model
When using a real estate investment model, whether it's an Excel spreadsheet or an off the shelf software application, there are several things you should consider.
These would be considered best practices for modeling any residential or multi unit property investment.
At the start, you need to have a clear and detailed plan for the property purchase, financing, rehabilitation, rental role, marketing, taxes, legal and other income and expenses.
This means an inspection of the property should have already been done.
You should know with some accuracy what financing rates and terms you are likely to get from your lenders.
You definitely must know the expected taxes and insurance costs.
Finally, if the property has been used for rental previously you should obtain as much rental history as possible, including data by unit, tenants, month, year, and percentage on time vs.
late payments.
This gives you a complete view of the property from a financial standpoint and prepares you to input solid data into your real estate investment model.
Next, you need to input as much data as possible into the model.
Each different real estate investment model requires different data and formats.
The most popular is monthly or quarterly data.
Once this is done you will be able to identify gaps in your data, which you can fill in based on your initial assumptions or past experience, or go back and get more historical data.
Then you should get a baseline scenario.
This is typically the property "as is" with no changes to the tenants, building condition, taxes, insurance, rental rates, financing, etc.
This will give you a view on what kind of cash flows the property generates currently, which you can project into the future.
At this point, you may also make a preliminary go or no go decision on the investment.
Finally, if you've decided to move ahead you can start modeling different scenarios in your real estate investment model.
What if I repaint and landscape? What if I evict the existing tenants and replace them with new better paying tenants at higher rates? What if we obtain a local development subsidy? What are my financing rates and how does the break even point change as interest rates change? What if I get a 2nd mortgage? How big does the down payment need to be? What if we advertise? How much will that cost, how quickly will it bring new tenants, at what price, and how will this affect the cash flows.
There are many more details to do, but the above process is a high level best practices for using your real estate investment model.
These would be considered best practices for modeling any residential or multi unit property investment.
At the start, you need to have a clear and detailed plan for the property purchase, financing, rehabilitation, rental role, marketing, taxes, legal and other income and expenses.
This means an inspection of the property should have already been done.
You should know with some accuracy what financing rates and terms you are likely to get from your lenders.
You definitely must know the expected taxes and insurance costs.
Finally, if the property has been used for rental previously you should obtain as much rental history as possible, including data by unit, tenants, month, year, and percentage on time vs.
late payments.
This gives you a complete view of the property from a financial standpoint and prepares you to input solid data into your real estate investment model.
Next, you need to input as much data as possible into the model.
Each different real estate investment model requires different data and formats.
The most popular is monthly or quarterly data.
Once this is done you will be able to identify gaps in your data, which you can fill in based on your initial assumptions or past experience, or go back and get more historical data.
Then you should get a baseline scenario.
This is typically the property "as is" with no changes to the tenants, building condition, taxes, insurance, rental rates, financing, etc.
This will give you a view on what kind of cash flows the property generates currently, which you can project into the future.
At this point, you may also make a preliminary go or no go decision on the investment.
Finally, if you've decided to move ahead you can start modeling different scenarios in your real estate investment model.
What if I repaint and landscape? What if I evict the existing tenants and replace them with new better paying tenants at higher rates? What if we obtain a local development subsidy? What are my financing rates and how does the break even point change as interest rates change? What if I get a 2nd mortgage? How big does the down payment need to be? What if we advertise? How much will that cost, how quickly will it bring new tenants, at what price, and how will this affect the cash flows.
There are many more details to do, but the above process is a high level best practices for using your real estate investment model.
