Getting into the real estate investment game can seem like an intimidating venture if you are just starting out. “Property” includes everything from a small rental house to a multi-unit apartment building. It can also be any residential or commercial building that earns a profit and can be bought and sold.
Each type of property has different financial models and profit margins. For example, a multi-unit apartment complex will have a very different revenue stream than a hospital.
The process of Financial Modeling For Real Estate allows investors and buyers to gain a larger picture of the proposed project for their review. It also allows for planning of development, financing and scheduling for upcoming investment projects.
Real Estate Investment Trusts
Smaller investors may choose to buy individual properties on their own or to invest with a REIT (Real Estate Investment Trust). These are groups of investors that may have thousands of properties in their holdings. Each REIT will often focus on one type of property venture such as commercial or residential purchases. They rely on investors to provide money to buy new properties, renew and refurbish where necessary and sell again for profit. There are three types of REITs that you will find in the industry.
Equity REIT - Purchase, improve and sell properties
Mortgage REIT - Buy and sell mortgages on properties
Hybrid REIT - A combination of both Equity and Mortgage
Financial Modelling Process
When going through the process of financial modeling for real estate, you are essentially preparing a proposal to present to investors and financiers of the validity of your project. You want to be able to show all of the pertinent information that can provide an overall picture of your proposal for consideration. Some of the things that should be included in your financial model are:
Assumptions
These are the costs of your project that can only be estimated prior to breaking ground. Your numbers must be based on written estimates and quotes, and should always be inflated to protect your interests.
- Construction schedule timetable
- Development costs
- Unit sales
Development Model
Your investors and financiers will want to see that you have considered all aspects of your project build. These projections will allow investors to consider whether your project is worth the risk and will guarantee a healthy return on their investment.
- Capital costs
- Revenue
- Commissions
- Pre-construction and post-construction costs
- Interest expenses
Pro Forma
A Pro Forma is essentially a summarized version of your basic proposal. It should provide all of the relevant numbers, prices, estimates and details of your project at a glance.
- Property statistics
- Return on sales
- Project schedule
- Budget projections
Property investment has long been known as one of the safer methods of growing your wealth as opposed to playing the trade markets. For those that are just starting out, the real estate world can seem confusing and a bit overwhelming, so it’s a good idea to do your homework and talk to some experts before making your first move.
