Most investment real estate financial modeling is done in spreadsheets. These can be built for the purpose or, better in addition, purchased from a reputable software vendor or consulting firm that specializes in real estate. When building or buying a good real estate investment spreadsheet, there are several basic elements you should consider.
The first consideration is how clear and accurate the Excel formulas are. The keys here are easy accessibility and logical flow of the formulas. That method they should be either directly coded in the spreadsheet cells or written in an easy to reach VBA module, open to the user to view and change. Both of these approaches provide the ability to audit and test the formulas without requiring complicate actions on the end user’s part.
The second part of a good real estate investment spreadsheet is a long cash flow projection period. character investments are typically very long term — from 10 to 20 years on average. In particular, if you are buying real character for long term portfolio holdings, it makes sense to have at the minimum 10 years of monthly or quarterly data, and already up to 30 years. This ensures you capture the complete future cash flows, and enables a much more accurate determination of net present value, internal rate of return, and capitalization factors.
The third important consideration is the availability of different cash flow valuation methods. Depending on the purpose and means used for the real estate investment, you may want to value the investment on a pro forma basis under a variety of different assumptions. You may also want to calculate or use the break already point, IRR, NPV, and cap rate factors for various purposes. Ensuring the necessary calculations and inputs are obtainable makes it easy to use the same form for different investment opportunities, and eliminates the need to go into all the necessary data twice.
The fourth part to look for in a real estate investment spreadsheet is the ability to input growth rates. Instead of manually keying in different numbers, say for utility costs or rental rates, simply changing a regular growth rate is much faster and easier. Most good investment models will allow the user to change the important input factors via growth rate variables. This significantly reduces the time to analyze different scenarios and allows the spreadsheet form to be semi-automated.
These are just a few of the factors you should consider, but these ones are quite important for a complex real estate investment spreadsheet.