Hey guys and gals,
So over the past few days I've decided to put my finance and business background to good use and build a financial model from scratch, using a few ideas and pictures I've seen around the internet and on BP. My goal is to be able to put in a few numbers (purchase price, improvements, closing costs, financing info, revenue assumptions and op ex) and essentially get a full analysis on if a property is worth investing in based on the criteria I've set out for myself. Right now, my model shows this information automatically once the necessary information is entered:
LTV, Cost/PSF, Cap Rate, GRM, CoCR, ROI, DSCR, projected revenues, expenses, and the resulting Gross Rental Income, Op Ex, NOI, Annual CF, Equity Capture, Appreciate and Total Return in dollar amounts over an 10 year model and adjusting for inflation.
I also have a DSCR/COCR/ROI Sensitivty analysis page, an amortization schedule accurate up to 30 years and a criteria worksheet page that I plan to coordinate with the primary page to show conditional formatting with the resulting numbers to visually tell me what metrics work with my criteria and which ones do not.
I also have a page that will allow for pictures of the property, the property address, type and size.
I'm in the process of adding graphs and other aesthetics to make the package look a little more appealing to the eye. In terms of presenting this type of information to equity partners, lenders or just to my friends and family to show them the potential power of real estate, what do you guys suggest I include in this aesthetic portion? And also, if I missed anything with my technical analysis, I would love to hear about that as well :) currently, I plan on adding a graph to show projected COCR per year, a pie chart correlating to operating expenses and also a rolling ROI.
Sorry that this was lengthy, but I wanted to be thorough! Thanks for any help, insight or advice you can give me. Cheers!
What type of properties are you looking for? It's a lot simpler for me. I mostly look for SFH and basically know what rents and taxes are where I look for properties, so that mainly leaves purchase price and reno costs. Not too complicated.
Treivor: I'm glad to see you're putting together your own model. I used (www.adventuresincre.com) as a good baseline to build my multifamily and commercial models.
In addition to the metrics you've included, add unlevered metrics as well. It will make it easier to compare properties, independent of debt.
1) Unlevered yield (cash on cash)
2) Unlevered IRR
@Eric James I'm primarily looking for small multi-family properties (2-4 units). I know some of the information in my model is probably more than I need and possibly excessive, but I want to build a model that will take into account all factors for my long-term goals. I eventually want to invest in large apartment complexes, which will require this type of in-depth analysis. I also just think its good for my own knowledge as a beginning real estate investor to know how the numbers work for a bunch of different types of metrics, how they interact with each other, why they're important and what they can tell me about a property quickly.
@Tyler Kastelberg is there a difference between unlevered yield and cash on cash return? and would we just use the projected annual cash flows as our values for unlevered IRR? Or is there something else I should consider with that calculation?
Also, whenever we've calculated our IRR, what do we generally want to compare it to, to give us some idea of whether we want to accept a real estate project and what our margins will be? Would we compare it to other real estate projects in our pipeline and the one with the highest IRR that also fits the rest of our criteria is the one we should accept? Just trying to grasp the concept of IRR in terms of real estate deals....thanks!
As an engineer put the data away and pick up the phone and build real relationships.
Answers to your questions:
1) Unlevered Yield is the same as unlevered cash on cash return = cash available for debt service/equity contribution (most likely the total purchase price plus closing costs)
2) IRR is useful when compared across "like" real estate deals. IRR measures profitability but not risk. You'll want to compare risk across deals using a metric like "debt service coverage ratio."
Hope this helps!
@Tyler Kastelberg that makes sense! I'm looking up a bunch of youtube videos on how to do calculations involving NPV and IRR matrices as well...and starting to realize how little I know about this business right now haha
@Treivor Cashion - what's your goal here? Are you building a business to compete with the BP calculators or want to create your own as a tool to raise money? What's the plan?
I appreciate you want to grind on the numbers, but for small MFRs, your tool would make me have analysis paralysis. All the acronyms are great, that's the world we live in. It looks like alphabet soup vomit, but the most important thing is to focus on your goals, streamline the process to accomplish. You'll make mistakes like all of us on here, part of the learning curve, right of passage (?), but you'll make a course correction.
And if you're looking to raise money, @Lane Kawaoka provides the best advice: Build relationships. Not spreadsheets.
Probably out of scope for what you are building, but metrics about the neighborhood around the address... $PSF, time on market ( for both sales and rentals for various property types) trends, crime trends, etc.. It would be very cool to see a trend of both the time it takes to rent/sell a property and the trend for $/PSF for both rents and sales, especially when taking into account the time of year.
Also out of scope probably, but a touchpad-based property checklist for the inspection and estimating renovation costs. There's a great book that BP puts out for estimating rehab costs, but it would be awesome to walk through a prospective property with a touchpad that forces me to check all the important bits and record photos, and then spits out an estimate of the rehab costs in a similar way that that book does.
Both of those ideas already exist in the marketplace I'm sure, but those two bits are absolutely vital in the go/no-go decision on a property in my opinion.
@Jay Helms always great to hear your input man! Once I'm done with this model, I'll be hitting you up to see if my deal analysis is accurate. The goal here is to familiarize myself with the different financial metrics in real estate investing, how they're calculated and to build a model to my own specifications to get the numbers that I want to see when it comes to rental real estate pro formas. With my own model, instead of downloading one from the internet, I'm able to accomodate it more easily to my own wants and needs as well as give myself a little credibility when it comes to analyzing deals if I want to present them to mentors, potential investors, and family and friends that might be interested in contributing investment capital. I'll know exactly how the model works and how it's integrated together, as opposed to just saying "oh, I downloaded this model from the internet and it looked good"...doesn't sound like I was being proactive or vigilant with my REI education if that's my answer to someone asking about my models lol
You're right in the sense that I don't want to have analysis paralysis. That's always in the back of my head, but right now I'm purely in the education phase of my REI strategy and this is one of the best (and fun) ways for me to learn about how the numbers work together in a real estate investment to give us an overall picture of if it would be a lucrative investment or not based on our predetermined criteria. Do you think I'm doing too much at the moment, in terms of analysis? Don't get me wrong, I've gone to quite a few investor meetings over the past couple weeks when I can...so I'm not ignoring the building relationships part as I'm building this model by any means! But I do feel like it's important to have a very solid understanding of the numbers
@Account Closed excellent points! I'm planning on adding those types of analysis to my models at some point along the line! But you're right, it's kind of out of the scope of my current goals when it comes to this model. I'll be taking your suggestions into consideration as I move farther along with it though, for sure! Instead of a more financial metric, you would also want to see more of a demographic/geographic analysis as well, which is also a huge aspect to real estate investing!
Absolutely @Treivor Cashion hit me up. And do I think you're doing too much? With your finance background you have a good base, enough IMO, to pull the trigger on a deal. Look, you don't know what you don't know and you're not going to learn those things you need to know until you close and own a deal. Also, a lot easier to raise money for future deals once you can show experience.