Property Assessment And Property Portfolio Management For Real Estate Investors – Home / Free Resources / Real Estate / How to Create a Real Estate Investment Model in Excel
A real estate investment model is used to analyze cash flows and returns to stakeholders from real estate assets or property purchases. Unlike corporations that use a three-statement model (income statement, balance sheet, and cash flow statement), the real estate model is primarily a cash flow statement with several subpages about revenue, expenses, financing, metrics, and revenue. Multiple assets can be grouped into one model; but in most cases the analysis is carried out on the basis of ownership.
Property Assessment And Property Portfolio Management For Real Estate Investors
In real estate, a successful business is defined by paying the right price, choosing the right capital structure, managing the property at the highest level of efficiency, and selling at the right time and price. A model is needed to collect and present this data for analysis.
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The main participants in real estate investment are bonds and stocks. The analysis is designed to meet their risk/return profiles. Let’s look at debt investors first. They lend based on the value of the property. This is called the loan amount. However, when a loan is made, there must be cash flow to service the loan – interest and principal payments. A cash flow analysis of the property is necessary to determine whether the rental income, including any construction costs, is sufficient to service the loan. The cash flow that loan holders look at to determine debt service coverage is called cash flow because it is not yet affected by the financial structure.
From an equity perspective, the model should do more than this because equity investors have a higher cost of capital or required return than debt holders. The real estate model looks at historical cash flow to determine if the property is in terms of generating cash flow. Next, it is necessary to estimate future cash flows. Rental income and building operating costs, as well as capital or long-term costs, should be forecasted. Since equity holders’ income comes after debt holders, we need to look at cash flow after debt is paid off. This is called cash flow. This is the cash flow that goes to the equity investors. Shareholders measure their returns using metrics such as IRR (Internal Rate of Return), MOIC (Multiple on Capital Employed) and cash flow (which measures regular dividend payments).
Below is an example of the type of analysis done for stock investors. Access to view the free download
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Rental income is a key factor and is highly dependent on existing leases. A very detailed real estate model with rental estimates for each tenant. Estimates also include rent increases, as well as potential vacancies, as well as credit losses (tenants who fail to pay rent). This analysis can be extremely complex from a modeling point of view, so it is usually only done when the buyer is serious about the investment or by an asset manager who is responsible for maintaining a high yield on the asset. The modeler should also consider any ancillary income that is part of the property, such as parking, concessions, sales, maintenance, etc.
The costs of daily use of the building are operating costs. Major construction costs include insurance, property taxes, and common area maintenance (CAM). In addition, there are utility costs for rental properties. Depending on the type of leasing, these expenses are fully paid by the lessee (tenant), which are divided by the lessor and the lessee, or paid in full by the lessor. This affects the model. In many buildings, the leases are flexible, so if one tenant is responsible for their share of the costs, other leases will likely work the same way. Costs are apportioned to a proportionate share of the space available for rent.
Net rental income and operating expenses is called net operating income, or NOI, and it’s a very basic measure of a property’s profitability.
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There are costs that are not considered part of day-to-day maintenance, but instead benefit owners in the long run. These include significant improvements to the property such as landscaping, new elevators, painting/decorating and structural elements such as roofs, parking decks, etc. They are less discretionary than operating expenses, so they are not included in NOI.
In addition, there are other expenses that fall into the category of capital expenses, which include how the property is managed and are not considered daily. When leasing vacant spaces or renewing leases, the broker is paid a commission based on the contract. It is considered long-term because it benefits the contract. In addition, in order to attract new tenants, a number of incentives were given, which included improving the space for new tenants. These can be infrastructure improvements or funds that will be used to build space.
The NOI and capex grid provides unrestricted cash flow that we can use to start our stakeholder analysis. Due to the single tax structure of real estate assets, no corporate income tax is payable, but personal taxes are applied to temporary income.
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The terms of the loan or loans now need to be modeled so we can determine if there is cash flow or a cushion to support the loan. We also need to determine principal and interest payments to determine inventory cash flow or cash flow after debt service. An example of loan arrangement is shown in the figure below.
Cash flow allows us to see how much cash is left for quarterly or annual distributions to investors. With the cash flow modeled by investment li, we can also determine what the total return for the equity investor is from an IRR analysis. An example of a return on equity analysis is shown in the chart that appears earlier in the blog post.
Depending on the time and data available, the real estate model can be very simple or very detailed. With any prediction, there is an element of guesswork and speculation. With real estate, we have the opportunity to predict the rent in the building. This means that a very detailed model often shows monthly cash flow, as this is how rent and operating costs are handled. Loan holders often require monthly service. Investors don’t need to see monthly returns because their distributions are quarterly or yearly. But once we have a monthly model, it’s easy to add quarterly or annual billing.
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A detailed lease-to-lease or tenant-by-tenant model is essential for accurate transactions or for a property manager who oversees the performance of the property. For any other purpose, a model can be built that makes broad assumptions about revenues and costs based on historical figures and market forecasts.
Real estate models are essential for the analysis needed to buy, manage and sell assets. These models are usually done monthly, but can be quarterly or yearly. They can be extremely complex and cash flow models per tenant or lease, or they can be more complex and predictable based on historical and general market trends. In any case, business stakeholders can look at their potential returns and the risks inherent in the investment to determine if it is appropriate or if improvements are possible to increase revenue. The Real Estate Analyst course teaches you how to build a real estate investment model. Portfolio management is the art and science of selecting and controlling a group of investments that meet the long-term financial goals and risk tolerance of a client, company or institution.
Some people manage their own investment portfolio. It requires a basic understanding of the key elements of portfolio construction and maintenance that contribute to success, including asset allocation, diversification and rebalancing.
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Professional licensed portfolio managers work on behalf of clients, while individuals can build and manage their own portfolios. In both cases, the ultimate objective of the portfolio manager is to maximize the expected return on investment within an appropriate level of risk exposure.
Portfolio management requires the ability to weigh the strengths and weaknesses, opportunities and threats across a range of investments. Options include leverage, from debt and equity to domestic and international, and growth versus security.
Passive management is a long-term set-it-and-forget-it strategy. This may include investing in one or more exchange-traded funds (ETFs). This is commonly referred to as indexing or index investing. Those building indexed portfolios can use Modern Portfolio Theory (MPT) to help them optimize the mix.
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Active management involves more active efforts than indicators
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