Financial Modeling: Investment Property Model

Building financial models is an art. The only way to improve your craft is to build a variety of financial models across a number of industries. Let's try a model for an investment dlf one midtown that is not beyond the reach on most individuals -- an investment Property.

Before we jump into building a financial model, we should ask ourselves what drives the business that we are exploring. The answer will have significant significances for how we construct the model.

Who will Use it?

Who will be using this model and and what will they be using it for? A company may have a new product which is they need to calculate an optimal price. Or an investor may want to map out a project to see what kind of investment return he or she can expect.

Depending on these scenarios, the effect of what the model will calculate may be very different. If you can't know exactly what decision the user of your model needs to make, you may find yourself starting over once or twice unless you want to find a blueprint that uses the right inputs to find the appropriate results.

On to Real estate

In our scenario, we want to find out what kind of financial return we can expect from an investment Property given certain information about the investment. This information would include variables such as the sticker price, rate of appreciation, the price at which we can rent it out, the financing terms available fore the Property, etc.

Our return on this investment will be driven by two primary factors: our rental income and the appreciation of the Property value. Therefore, we should start by forecasting rental income and the appreciation of the Property in consideration.

Even as have built out that element of the model, we can use the information we have calculated to figure out how we will finance the purchase of the Property and what financial expenses we can expect to incur as a result.

Next we tackle the Property management expenses. We will need to use the Property value that we estimated just to be able to calculate Property taxes, so it is important that we build the model in a certain order.

Basic projections in place, we can will piece together the income statement and the balance bed sheet. As we put these in place, we may spot items that we haven't yet calculated and we might have to rewind and add them in the appropriate places.

Finally, we can use these financials to project the income flow to the investor and calculate our return on investment.

Showing off the Model

We should also think about how we want to lay it out so we keep our workspace clean. In Excel, one of the best ways to organize financial models is to separate certain parts of the model on different worksheets.

We can give each bill a name that describes the information contained in it. This way, other users of the model can better understand where data is calculated in the model and how it flows.

In our investment Property model, let's use four tabs: Property, financing, expenses and financials. Property, financing and expenses will be the tabs on which we input forecasts and make projections for our model. The financials bill will be our results page where we will display the output your model in a way that's easily understood.

Forecasting Revenues

Let's start with the Property bill by renaming the bill inch Property inch and adding this title in cell A2 of the worksheet. By taking care of some of these formatting giving on the front end, we'll have an easier time keeping the model clean.