How do you ensure your financial model is strong enough for a real estate project?

1 Define your objectives

Before you start creating your financial model, you need to have a clear idea of what you want to achieve with your project. What is your target market, location, product type, and exit strategy? How much capital do you need, and how will you finance it? What are your assumptions and expectations for the market conditions, demand, supply, costs, and revenues? By defining your objectives, you will have a solid foundation for your financial model, and a way to measure its performance and feasibility.

2 Gather relevant data

The next step is to gather as much relevant data as possible to support your financial model. This includes market research, comparable sales, rental rates, occupancy rates, operating expenses, taxes, fees, and any other factors that affect your project's cash flow and profitability. You can use various sources of data, such as online databases, industry reports, local experts, brokers, appraisers, and consultants. However, you should always verify the quality and accuracy of the data, and adjust it for your specific project and location.

3 Build your structure

Once you have your data, you need to build the structure of your financial model. This means deciding on the format, layout, inputs, outputs, and calculations of your model. You should use a spreadsheet software, such as Excel or Google Sheets, to create your financial model. It's important to use separate tabs for inputs, outputs, assumptions, and calculations. Additionally, you should use clear labels, headings, and formatting for each section. Utilize formulas and references to link the cells and avoid manual inputs; also consider using color codes to distinguish between inputs and outputs. Lastly, include charts, graphs, and tables to visualize and summarize the results.

4 Test your scenarios

After you build your structure, you need to test your financial model for different scenarios. This means changing some of the inputs and assumptions, and observing how they affect the outputs and results. For example, you can test how your project's performance changes under different market conditions, interest rates, occupancy rates, construction delays, cost overruns, or sales prices. By testing your scenarios, you can identify the key drivers and risks of your project, and evaluate its sensitivity and resilience.

5 Review your results

The next step is to review your results and check if they meet your objectives and expectations. You should use some common metrics and indicators to measure your project's feasibility and profitability, such as net present value (NPV), internal rate of return (IRR), equity multiple (EM), cash on cash return (CoC), and debt service coverage ratio (DSCR). Compare your results with your target values, industry benchmarks, and standards. Additionally, analyze the sources and uses of funds, the cash flow statement, and the profit and loss statement of your project.

6 Refine your model

The final step is to refine your model and make any necessary adjustments or improvements. You should review your model for any errors, inconsistencies, or unrealistic assumptions, and correct them. You should also update your model with any new data or information that becomes available. You should also seek feedback from other professionals, such as your partners, lenders, investors, or advisors, and incorporate their suggestions or comments. By refining your model, you will increase its accuracy and reliability, and enhance your confidence and credibility.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?