Essential Real Estate Modeling in Excel
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The document outlines a course on essential real estate modeling in Excel, providing guidance for analysts, consultants, and investors. It covers various business models, including buy/rent strategies, hotel and Airbnb modeling, and property flipping, emphasizing decision-making using financial metrics like NPV and IRR. Key concepts such as time value of money, total cost of ownership, and case study analyses are also discussed to help users make informed real estate decisions.
Essential Real Estate Modeling in Excel
- 1. 1 Essential Real Estate Modeling in Excel Practical guide for Business Analysts, Management Consultants & Investors
- 2. 2 Modeling real estate in Excel is not an easy task. In this course I will show you how to model different business models related to real estates.
- 3. 3 You will learn how to decide whether to buy or rent an apartment for yourself. I will show you how to make more rational decision with Excel.
- 4. 4 We will also have a look at how to model other business models related to real estates in Excel. We will look at buying properties and renting it to others.
- 5. 5 We will model a Hotel Business Model in Excel as well as a lighter version of a similar business model - Airbnb chain.
- 6. 6 You will also learn how to model so called flips where you buy, renovate and later on sell the property at a higher price.
- 7. 7 This presentation will help you model real estates on the level of top management consultants and to make more rational decisions
- 8. 8 Modelling Buy & Rent Modelling Hotels & Airbnb Essential Concepts Modelling Restaurants Modelling Flips
- 9. 9 What you will see in this presentation is a part of my online course where you can find case studies showing analyses along with detailed calculations in Excel Essential Real Estate Modeling in Excel $190 $19 Click here to check my course
- 12. 12 Modeling real estates requires learning certain concepts that will help you handle the long-term nature of real estates. This is what we will discuss in this section.
- 13. 13 In this section we will discuss the following concepts Main business models in real estate Time value of money NPV & IRR Total cost of ownership Rent or buy a house – case study Types of Loans
- 14. 14 Main business models in real estate
- 15. 15 There are 4 main things you can do around the real estates. Real estates But to Sell Rent Build Servicing Real Estates Light Flips Buy & Rent as is Buy & Rent after upgrade Construction Companies Developers Other Repair & Maintenance Services Managing Properties Other Extensive Flips Buy & Keep for long time (protection against inflation) Buy, Remodel and Rent afterwards Rent to Rent Hotel Model Airbnb Model
- 16. 16 Time value of money
- 17. 17 Let’s first start by calculating what is the future value of 100 USD 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Future Real Value of 100 that we have today 100 105 110 Nominal Value x (𝟏 + 𝒓)𝟏 Nominal Value x (𝟏 + 𝒓)𝟐
- 18. 18 Now imagine that the you are getting 100 USD every year. You want to calculate the Present value of the money 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓)𝟏 Nominal Value (𝟏 + 𝒓)𝟐
- 19. 19 NPV
- 20. 20 Let’s start with a short definition NPV stands for Net Present Value NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period usually related to some investment It’s used to determine whether something (action, investment etc.) makes sense or not NPV =
- 21. 21 Just as a reminder Present Value of money is different than the Nominal Value 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓)𝟏 Nominal Value (𝟏 + 𝒓)𝟐
- 22. 22 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%)𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%)𝟐 300 (𝟏 + 𝟓%)𝟑 300 (𝟏 + 𝟓%)𝟒
- 23. 23 NPV enables you to make decisions about specific investment NPV 0 > The investment can generate more cash than it requires. Can be considered to be done NPV 0 < The investment will be eating away cash. Rather consider not doing it NPV 0 = Neither creates nor destroys value. Look for other criteria i.e. strategic, tactical factors
- 24. 24 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%)𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%)𝟐 300 (𝟏 + 𝟓%)𝟑 300 (𝟏 + 𝟓%)𝟒
- 25. 25 IRR
- 26. 26 Let’s start with a short definition IRR stands for Internal Rate of Return IRR is a discount rate that makes the net present value (NPV) of all cash flows from a specific project equal to zero IRR tells us how much you would have to earn on saving account every year to get to the same results as from the investment you are analyzing IRR =
- 27. 27 If you want to decide on whether to do certain investment or not compare IRR with the right interest rate IRR Interest rate > The investment can generate higher returns than the alternatives. Can be considered to be done IRR Interest rate < The investment will generate lower returns than the alternatives. Rather consider not doing it IRR Interest rate = The investment is as good as other alternatives. Look for other criteria i.e. strategic, tactical factors
- 28. 28 NPV and IRR gives you the same directional information NPV 1 NPV 2 > Investment 1 is better than Investment 2 IRR 1 IRR 2 > Investment 1 is better than Investment 2
- 29. 29 Check the video for more details Click here to go to the video
- 30. 30 Total cost of ownership
- 31. 31 All the cost related to owning or using a specific item / thing It will also include the cost of lost opportunity i.e. money not earned due to spending time on repairing the thing Total cost of ownership = Let’s start with a short definition
- 32. 32 Cost of buying a car Insurance Fuel Cost of maintenance including repairs & parts Time wasted on maintenance, parking etc. Other i.e. parking tickets, traffic ticket etc. Let’s compare the cost of owing a car and using a rideshare / taxi / cab service Cost of rideshares
- 33. 33 Check the video for more details Click here to go to the video
- 34. 34 Rent or buy an apartment / flat – Introduction
- 35. 35 Let’s imagine that Peter is considering 2 choice: buying an apartment or renting it. Let’s use the total cost of ownership to see what makes sense.
- 36. 36 Let’s have a look at the information that Peter has Buying the apartment would require EUR 150 K Renting cost EUR 600 per month Interest rate is 3%, inflation 2%, Wage increase is 5% Peter currently earns EUR 30 per hour
- 37. 37 Check the video for more details Click here to go to the video
- 38. 38 Loan – Main elements
- 39. 39 Let’s have a look at main elements of the Loan Principal Interest Paid Payments Interest rate The amount that you are borrowing from the bank Loan Duration The price of the loan you are borrowing expressed as a percentage of the outstanding /not paid amount of the principal Number of year / months after which you have to fully repay the loan The price of the loan you are borrowing expressed in value Paid monthly or yearly Can be usually calculated multiplying the interest rate by the outstanding / not paid amount of the principal The amount of the money you pay to the bank It will consist of 2 parts: principal payment and interest paid
- 40. 40 Let’s have a look at a loan with fixed annual Payment of 7.4 K – first year Principal Interest Paid in the 1st Year Payments Interest rate Loan Duration 100 K 4.0 K 7.4 K 4% 20 4.0 K of Interest Paid 3.4 K of Principal Payment
- 41. 41 Let’s have a look at a loan with fixed annual Payment of 7.4 K – second year Principal Interest Paid in the 2st Year Payments Interest rate Loan Duration 100 K 3.9 K 7.4 K 4% 20 3.9 K of Interest Paid 3.5 K of Principal Payment
- 42. 42 Let’s also have some have a look at other important terms Loan Payment Schedule Balloon Payment This a table which tells you how much you will be paying every year principal and interest paid Sometimes called Loan Amortization Schedule Big payment of the loan done usually at the end of the loan Mortgage This is type of loan secured by a collateral of specific real estate
- 43. 43 Type of Loans
- 44. 44 First let’s divide the loan in terms of how they are being paid Fully Amortized Loan / Annuity You pay the loan in equal periodic payment The periodic payment pays the interest due and part of the principal Interest Only Loan During the duration of the Loan you pay only the Interest At the end there is balloon payment of the whole loan Other Increasing Periodic Payment Decreasing Periodic Payment A few balloon payments
- 45. 45 Let’s have a look how the payment of the Fully Amortized Loan would look like. Below the data on the Loan Principal Interest Paid in the 1st Year Payments Interest rate Loan Duration 100 K 4.0 K 7.4 K 4% 20 4.0 K of Interest Paid 3.4 K of Principal Payment
- 46. 46 Let’s have a look how the payment of the Fully Amortized Loan would look like. Below the data on the Loan Principal Interest Paid in the 2st Year Payments Interest rate Loan Duration 100 K 3.9 K 7.4 K 4% 20 3.9 K of Interest Paid 3.5 K of Principal Payment
- 47. 47 Below the payments throughout the duration of the Fully Amortized Loan 4,0 3,9 3,7 3,6 3,4 3,3 3,1 2,9 2,8 2,6 2,4 2,2 2,0 1,8 1,5 1,3 1,1 0,8 0,6 0,3 3,4 3,5 3,6 3,8 3,9 4,1 4,2 4,4 4,6 4,8 5,0 5,2 5,4 5,6 5,8 6,0 6,3 6,5 6,8 7,1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest Paid Principal paid back
- 48. 48 Let’s have a look at a how the payments would look like if we took a Interest Only Loan Principal Interest Paid every year Payments Interest rate Loan Duration 100 K 4 K 4 K every period for Interest 4% 20 100 K of Principal Payment at the end
- 49. 49 Below the payments throughout the duration of the Interest Only Loan 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest Paid Principal paid back
- 50. 50 First let’s divide the loans in terms of what interest rate they use Fixed rate The interest rate is fixed during the whole duration of the loan Variable Rate The interest rate will be changing during the whole duration of the loan Usually it is related to some market interest rate set by central bank / FED Other Capped rate – variable but with some limit Adjustable rate mortgage – interest rate is fixed for a period, after which it will periodically (for example, annually or monthly) adjust up or down to some market index.
- 51. 51 You can also combine both divisions Fully Amortized Loan / Annuity Interest Only Loan Fully Amortized Loan with fixed rate Fully Amortized Loan with variable rate Interest Only Loan with fixed rate Interest Only Loan with variable rate
- 52. 52 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Essential Real Estate Modeling in Excel $190 $19 Click here to check my course
- 53. 53 Modelling Simple Buy & Rent businesses
- 54. 54 Modelling Simple Buy & Rent businesses – Introduction
- 55. 55 In the case of Buy & Rent you want to generate enough money from the rent to be able to cover the repayment of the loan and slowly but surely increase the value of your portfolio.
- 56. 56 In this section we will have a look at 2 models Buy & Rent 1 apartment Buy & Rent multiple apartments
- 57. 57 Basic Buy & Rent Model – Case Introduction
- 58. 58 Let’s imagine that John is considering investing in an apartment that he wants to rent. He will be using a mortgage / loan to finance the purchase.
- 59. 59 Let’s have a look at the apartment that he considers buying to rent He considers buying 1 small apartment in Warsaw He will put USD 20 K of his own money For the rest he will take a mortgage for 20 years with interest rate 4.0% Help John estimate how much he can earn from this investment
- 60. 60 Buy & Rent Multiple Apartments – Case Introduction
- 61. 61 After the first investment John is considering going big scale and buying an apartment every year. Help him analyze the value of his assets.
- 62. 62 Let’s have a look at some basic information that we know about him He considers buying 1 small apartment in Warsaw every year He will invest 20% of his own money into apartments For the rest he will take loans for 20 years with interest rate 3.5% Help John estimate what will be the value of his assets in the next 20 years
- 63. 63 Modelling Airbnb & Hotels
- 64. 64 Modelling Airbnb & Hotels – Introduction
- 65. 65 Now we will move to modeling the business model of a hotel or similar models where you rent on daily basis (Airbnb, Booking.com etc.). They differ from the traditional Buy & Rent Models.
- 66. 66 In this section we will have a look at 2 models Hotel Business Model Airbnb Business Model
- 67. 67 Main drivers for a hotel business model
- 68. 68 Let’s first look at Margin after Variable Costs # of nights sold Average Daily Rate (ADR) Average Revenue per hotel x Average price per 1 night Additional revenue per 1 night # of available nights % Occupancy rate Cost of Breakfast Booking & Transaction Fees Cost of breakfast per 1 night sold + x Cost of Cleaning the Rooms Cost of cleaning per 1 night sold Variable Costs Margin After Variable Costs per Hotel x # of nights sold x x Average fee as % of revenue x +
- 69. 69 Now let’s have a look at fixed costs and their drivers Fixed costs related to space Labor Costs / People # of People Average wages # of sq. m Fee per sq. m x x Other Fixed Costs Fixed Costs of the Hotel without Depreciation +
- 70. 70 Now let’s have a look at the EBITDA Fixed Costs of the Hotel without Depreciation Margin After Variable Costs per Hotel Average EBITDA per hotel -
- 71. 71 Now let’s model the whole chain EBITDA on Hotel level Rent People # of People Average wages x Others + # of sq. m Fee per sq. m x Head Office Costs Total EBITDA - # of hotels Average EBITDA per hotel x
- 72. 72 Hotel Model in Excel – Case Introduction
- 73. 73 Paul has some capital from selling his SaaS startup. Now he wants to invest some of his money into a chain of hotels. Help him estimate how much money he has to invest.
- 74. 74 Let’s have a look at the general information we have He considers building 1 hotel every year An average hotel will have 70 rooms He plans to build 1 hotel every year for 12 years He wants to mainly use loans to finance the investments
- 75. 75 Airbnb Model in Excel – Case Introduction
- 76. 76 Paul has some capital from selling his SaaS startup. Instead of hotels he considers also renting apartments and offering them on Airbnb or Booking.com.
- 77. 77 Let’s have a look at the general information we have He considers renting on average 10 apartments every year He will sublet the apartments on daily basis mainly via Airbnb He will take also a loan to cover for Capex he needs Help him estimate the Profits in the next 12 years.
- 78. 78 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Essential Real Estate Modeling in Excel $190 $19 Click here to check my course
- 81. 81 An interesting business model is the business where you buy the property, you renovate it and you sell it at higher prices. The so-called flips have to be modeled in a different way. We will discuss it in this section.
- 82. 82 In this section we will discuss the following elements The nature of flips Flipping business drivers Modeling Flips in Excel
- 83. 83 The nature of Flips
- 84. 84 We will be using 3 different terms for flips Flip duration Slot The number of months from starting the flip to selling the renovated apartment / house The loan that we reuse during the year to make multiple flips Once we sell the property, we buy immediately another property that we will be flipping again Slot can be treated as an amount of money constantly invested in some property Slot can be treated also as 1 apartment that we can be flipping at any given time. So the number of slots determines how many apartments I can be flipping at the same time Flip / Flipping Purchase of an apartment / house that we renovate and subsequently sell at a higher price
- 85. 85 Let see how many flips we can achieve with 1 slot / loan in 1 year # of months 1st flip 2nd flip 3rd flip
- 86. 86 Let see how many flips we can achieve with 1 slot / loan in 1 year # of months 1st flip 2nd flip 3rd flip 4th flip
- 87. 87 Main drivers for flips
- 88. 88 Let’s first look at EBITDA before Head Office Costs # of flips done on slot Average EBITDA per 1 flip before HQ costs Average EBITDA per 1 slot before HQ costs x The value of the property at selling price The value of the property at purchase price + costs of flip # of months in the year Duration of 1 flip - ÷ # of slots Total EBITDA from all slots before HQ costs x
- 89. 89 Now let’s model the whole chain Total EBITDA from all slots before HQ costs Rent People # of People Average wages x Others + # of sq. m Fee per sq. m x Head Office Costs Total EBITDA - # of slots Average EBITDA per 1 slot before HQ costs x
- 90. 90 Flip Model in Excel – Case Introduction
- 91. 91 Javier wants to do flips on a bigger scale. He wants to take 1 new loan (slot) every year. Help him estimate how much money he can make from this business.
- 92. 92 Let’s have a look at the general information we have 1 loan line will be reused to buy new apartments On average a flip will take him 3 months By flipping the apartment he can increase the value by 800 USD / sq. m Help him estimate the Profits in the next 12 years.
- 93. 93 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Essential Real Estate Modeling in Excel $190 $19 Click here to check my course
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