The Timeless Appeal of Real Estate Investment
Real estate has always been one of the most rewarding investments of our generation. Matter of fact, not only our generation, it’s been one of the steadyest investments that people have been investing in the past hundred years. People have purchased property and just leted grow, most probably made a profit out of it. But such investments lack proper real estate financial modeling.
Of course there are unlucky individuals who had their markets disrupted by the environment around them. Or weren’t able to pull it up when we’re approached by real estate companies in order to help them with their financial modeling.
Evolving Landscape of Real Estate Investment
Real estate is not how it used to be. It used to be quite simple. It used to be that if you had purchased a house that in the matter of ten or 15 years, the pricing of this real estate item or house would increase in value.
But nowadays it’s really not easy for companies to purchase real estate due to the fact that mortgages are extremely high. Financing is not easy because you can’t really purchase a house except if you have cash.
And purchasing a house on cash is just simply not a smart idea due to the fact that you don’t have to do that. You can get a mortgage or credit in order to finance this house with a pricing that is now days.
Key Considerations in Real Estate Financial Modeling
When it comes to real estate financial modeling, there are a few things you ought to keep in mind:
- You have to start with market researching or researching the market. The real estate valuation in countries in Europe like Croatia is different than other countries in Europe, like Germany, even though they’re quite close to each other.
- It really depends on the mentalality of people there, whether they’re inter purchasing and selling properties or whether they’re not interested to do that at all.
- Supply and demand is what really moves the market. It’s not really the question of housing anymore or a place to live.
- It’s more of a question of do the majority of people in the society believe that real estate is a safe investment or not. If they do so, then they’re going to keep on investing in real estate for as long as you would think.
Personal Experiences and Recommendations
Personally, my parents always invested in real estate due to the way they were brought up. Or to the fact that they found success in one good real estate investment, so they kept on replicating the same exact thing.
A very good book to read is Rich dad poor dad because the author of the book worked on perfecting or understanding the real estate market quite well. He flipped a lot of houses and flipping houses is highly related to the real estate market. It requires certain art in order to understand what is a good decision versus what’s not.
Experience in this sense or for this author of the book played a big role. He would immediately call some some authors and purchase on the spot and then 10 minutes later sell it for a higher price, making money by practically just knowing things.
Creating a Perfect Real Estate Financial Model
Yet when it comes to any real estate, one ought to create a perfect financial model that is conservative. That is having a best case scenario and a worst case scenario.
But the number one thing as we mentioned that is to be done before that is to research the market very well. To know whether the market has a good performance over the years.
What are the mortgage rates? What are the increases in real estate value? Ask a million questions and answer those million questions in order to be able to draw a picture of how this financial model would look like.
Only then will you be able to pitch this financial model of the real estate to an investor or a partner who’s interested in rejoining you in this investment.
Pitfalls to Avoid in Real Estate Financial Modeling
I’ve been approached by a lot of companies that are looking to create a pitch deck and a financial model of a real estate project. It’s so easy to keep pitching an idea of a problem how great it is and it’s so easy to put a lot of numbers that don’t make sense and to make it very optimistic.
But the only way a smart investor would invest in the project is if they had seen the market performance in this specific region over the past X amount of years with a thesis.
Future Opportunities in Real Estate
A good example is you purchasing a property close to a big historical landmark that you’ believe is going to be important in the upcoming days. You investing in Silicon Valley before it became silicon Valley that we know.
Imagine how much our eye you can get from either renting or selling a real estate due to this particular thing. So it’s not really just about the market performance in the past. It’s also a doubt the future opportunities that you are seeing which makes the theory perfect in this sense.
Importance of Accurate Market Research
So you have to create a real estate financial model based on these elements. We have a few templates on our website that are showing good Excel sheets that you can use to model your financials quite well for a real estate project.
But it doesn’t go well without a good and decent market research that you’re going to have to conduct yourself or hire someone to do so. But only with this market research will you be able to have accurate numbers?
Validating Your Financial Model
Imagine this if you have a financial model with a specific return on investment, put this ROI or this growth of value on a line graph. And then put the market historically and its growth on another line graph stacked on top of it, and then asked herself, does this make sense.
If the value of real estate companies or real estate projects in that area has increased five times does it make sense that your projects would increase 20 times? Does it make sense that your project would increase only two times?
So make sense out of the numbers and only then will you be able to create a good real estate financial model.
PS. Check some of our free templates here; You’ll find some financial models you could definitely use.