How to get good at RE Modelling?

Monkeys, incoming REPE SA. Looking at lots of different course options and working through the WSP guide. Have looked a bit at P&L / OpEx / CapEx down to LFCF, waterfall, amortization table, JV modelling etc. What things do you guys think are a checklist for getting good at RE modelling?

 

To excel in Real Estate (RE) Modeling, especially as you're gearing up for a role in Real Estate Private Equity (REPE), it's crucial to build a strong foundation in several key areas. Here's a checklist based on the most helpful WSO content and insights from seasoned professionals in the field:

  1. Understand the Basics of Real Estate Finance: Before diving deep into modeling, ensure you have a solid grasp of real estate finance fundamentals, including concepts like Net Operating Income (NOI), Cap Rates, and Cash Flow analyses.

  2. Master Property-Level Cash Flow Statements: Being able to accurately model the cash flows from a property, including all sources of income and all expenses, is foundational. This includes understanding how to forecast rental income, operating expenses, and net operating income.

  3. Debt Amortization Schedules: Learn how to create detailed debt schedules that account for principal and interest payments over the life of a loan. This is crucial for understanding the financing side of real estate deals.

  4. Sources and Uses Table: Get comfortable with modeling the sources (equity, debt) and uses (acquisition cost, closing costs, capital expenditures) of funds for real estate transactions. This will help you understand how deals are structured financially.

  5. Equity Waterfall Modeling: This involves modeling the distribution of cash flows to different equity investors based on agreed-upon return hurdles. It's a complex but essential skill for structuring joint ventures and partnerships.

  6. Cap Rate-Based Valuation: Learn how to value properties using capitalization rates, which is a fundamental concept in real estate investment analysis.

  7. Return Metrics Calculation: Be proficient in calculating key investment return metrics such as Internal Rate of Return (IRR), Cash-on-Cash Return, and Equity Multiple. These metrics are critical for evaluating the attractiveness of real estate investments.

  8. Scenario and Sensitivity Analysis: Develop the ability to model different scenarios (e.g., best case, worst case) and perform sensitivity analysis to understand how changes in key assumptions impact investment returns.

  9. Excel Proficiency: Since most real estate modeling is done in Excel, advanced Excel skills are a must. This includes being comfortable with formulas, functions, and shortcuts that can streamline your modeling process.

  10. Practice with Real-World Case Studies: Apply your skills to as many real-world case studies as you can. This will help you understand the nuances of different types of deals, from multi-family to commercial to hotel assets.

  11. Leverage Quality Learning Resources: Consider enrolling in reputable real estate modeling courses (such as those offered by WSO) that can provide structured learning and practical exercises.

Remember, becoming proficient in RE modeling is a journey that requires practice, patience, and continuous learning. Engage with the community on forums like WSO, seek feedback, and don't hesitate to ask questions. Good luck on your path to becoming a REPE standout!

Sources: Real Estate Modelling Test Practice, Best Real Estate Modeling course? REFM? BIWS? WSP?, Real Estate Modelling Test Practice

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 
  • Know how to model yearly indexation / rental growth properly (e.g. can be yearly but applied monthly..)
  • Know how to model lease-up phases properly (TIs, LC, RFs, etc)

  • Look into different CapEx modelling assumptions (cost curves)

  • Research rates for the above to understand how these may differ across asset classes (Office vs Industrial business plans differ a lot, and Residential too, etc etc)

  • Ask your friends / alumni for case studies

    -Just mess around on excel with models and change a but of assumptions and think about the result, why it matters, what scenario that may apply to in real life, etc. Just be curious. Excel is a playground.

    Enjoy
 
Most Helpful

Not OP, but how can you know a model is 100% correct. Like I've used Justin Kivels courses which I did to learn and talking to someone experienced in the industry they said some of the metrics aren't real (like unlevered cash on cash is really a NCF yield in reality) and the way it's modeled is somewhat wrong with certain equations. I've also used old Associates Excel templates but would find errors in EM/MOIC calculations vs. how I learned it and would get different outputs than what they did. Also, everyone seems to layout a proforma differently and not building out one like Justin Kivel has for example making it harder sometimes as well. Sometimes there isn't a standard GPRR down to Unlevered/Levered cash flows (but most of the time there is). 

So how can you learn and be sure of the right way when you're told by experienced professionals some of the courses you used may not be 100% right, but then some of the professionals work doesn't line up from a range of different people. 

 

Totally agree. Generally, I think one should know the basics like calculating IRR, NPV, Coc, EM, DY, etc. Knowing how to make the model dynamic so you can alter some assumptions and then cash flows update accordingly. This way the firm knows that you know how to use Excel. But as for specifics like calculating returns and organizing the pro forma the “right way”, it is dependent on which shop you go to. They should train you up on how they expect things to look.

 

To this point, I think there is a difference between building a model based off assumptions given to you, as in a modeling case for an interview, vs. actually finding the market rent, expense line items/SF in a given market and knowing they are accurate. I feel as if most people setting out to learn modelling learn the former because that is where most resources and courses are, and have a much harder time learning the latter. How would a young RE analyst set out to learn specific assumption setting fundamentals. In other words, most modelers can do the modelling if you give them all the assumptions, but how would one go about improving or just simply learning how to find and set realistic assumptions for the property they are valuing?

 

I think rents are easiest to find - for multifamily using Costar for similar product and what improved product looks like in the area as a cap. Can also use streeteasy and apartments.com.

On operating expenses, I think that's tougher but taxes you can see if they're reassessed at purchase or not. Using historicals with a growth rate unless they're a very high % of operating expenses.

Others like costs can be an assumption, but vetted out with contractors. In my limited experience here, we were around but under what we thought costs were and the deal was not viable at the time.

Debt assume a lower 50-55% LTC loan and higher rate today, maybe fixed to keep it simple instead of variable. Purchase price using comps and finding actual properties with the same finishes instead of just using Costars outputs at face value.

 

creguyldn2 not sure if this is a dumb question, but would a cost curve for a capex item/items be included in a value add or stabilized acquisition model? I thought the S curve was only used in development models

 

If you’re looking for resources and are still a student or have access to your student email try project destined. If you’re out of school watch break into cre on YouTube

 

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