When utilizing a real estate investment model, whether it’s an Excel workbook or an off the shelf software application, there are many things you should look at. These can be regarded as recommendations for modeling any non commercial or multiple space property purchase.
In the beginning, you’ll want a clear and comprehensive plan for the property acquisition, funding, rehabilitation, rental plan, advertising, property taxes, appraisal and other revenue and costs. This implies an inspection of the unit should have already been completed. You should know with some accuracy what borrowing interest rate and terms you are likely to obtain from the lenders. You definitely must know the expected taxes and insurance rates. Finally, if the property was used for rent recently you should get as much rental background as possible, including history by unit, renters, month, year, and portion timely vs. late payments. This gives a complete idea of the investment from a financial standpoint and prepares you to enter solid data in the real estate investment model.
Next, you need to input as much financial information as possible into the spreadsheet. Each unique real estate investment model needs different data and formatting. The most typical is monthly or quarterly data. Once this is done it is possible to recognize gaps in your data, which you’ll fill in depending on your preliminary presumptions or previous experience, or return and get more historical data.
Then you should get a base scenario. This is usually the property “as is” with no alterations to the tenants, building condition, tax rates, insurance coverage, rental rates, financing, and so on. This provides you with a take on what kind of cash flows the potential investment generates now, which you will be able to forecast into the future. At this junction, you may make a preliminary go or no go decision on the investment.
Finally, if you have chosen to proceed ahead you can begin modeling various scenarios in your real estate investment model. What if I paint and landscape? What if I throw out the existing renters and replace them with brand new higher paying tenants at greater rents? What if we get a city improvement grant? What are my financing interest rates and how can the break even level change as interest rates change? What if I have a second mortgage? How big does the down payment need to be? Suppose we advertise? Just how much will that cost, how quickly will it get new tenants, at what price, and how will this affect the income results.
There are several more details consider, nevertheless the previously mentioned process is a high level guideline for using your real estate investment model.
