Modeling as a professional vs. as a student
When I was in my MSRE program, I put a lot of time and energy into learning modeling skills. I got pretty good at being able to build proformas from scratch with waterfalls and sensitivities, etc. These skills served me well in being able to perform well on modeling tests and ultimately land a job as an analyst. However, I'm not really putting any of these skills to use as an actual analyst.
I am currently working in REPE and my firm uses a model that was built by a third party. It's a complex model, but it's fairly simple to operate - just plug in a handful of inputs and it spits out everything I need to know. No real "modeling" required on the part of the analyst - no writing formulas or building anything. I understand how the model operates and what inputs are driving the returns, but is that going to be enough to advance in my career?
My concern is that I will get complacent and forget how to model things by hand. Does this matter? (A side question, do firms typically require modeling tests for associate positions?)
I think ultimately that is what modelling truly is. There is a lot of hype on this forum about being excellent at "modelling", but at the end of the day its really just inputs/outputs. If you understand what is going on, then that is all that matters- what is important is testing certain assumptions to make an educated decision, and if you can reach that point with a pre-built model (and do it faster bc it is a pre-built) then you are successfully doing your job. I imagine you went into REPE because you are interested in the deal process and making money (ultimately). People dont generally get into such careers to "model" as an end goal
Came here to say this. If you are having debates about which excel functions to use, then you're probably not the guy closing deals.
The emphasis on modeling slowly decreases once you are past the analyst stage and depending on the shop, at the associate level. At the VP level and above it's almost non-existent.
real world modeling is nothing really like modeling as a student... my opinion
People on this forum dramatically overemphasize modeling because:
It is primarily an investment banking forum (although I believe RE is the second most popular!)
Firms often have modeling tests as part of the interview process
It is a "hard" skill that you can focus on and feel good about yourself as a result
The reality is that success in real estate has so much more to do with "soft" skills like your ability to intelligently and rapidly respond to constant fire drills, your ability to get the best work out of people who know more than you do about what they do but don't see the big picture, your sense of urgency, your ability to communicate effectively, your network, your body of work, who your dad is, etc.
The only time you'll ever be truly "modeling" something on the job is if you're adding a new function to the company model (which they will outsource if they are big enough). Otherwise, it's plug and play. You need to understand how the model works so that you can effectively audit it, or pull on certain strings to see how it impacts the returns, but you do not need to build it. It would be so unbelievably inefficient and would just welcome mistakes.
Knowing how to model is like knowing what a cap rate is - it's a base line - like brushing your teeth before coming into the office is.
the above is 100% correct. like spot on
Spot on. Everything @CRE writes is always right smack bang on the truth.
There are a lot more important areas to focus on rather than being an model junkie.
richest guys in real estate I know all did the math in their head of on the back of an envelope
One of my real estate professors says his biggest investors just ask for a few key metrics (number of units, entry cap, etc.) and decide to invest based on that 5 minute conversation. Obviously there is a lot of trust in the relationship, but on the deal level, it can get boiled down to a few figures for the most part.
My take:
Would say modeling becomes more important at smaller shops that play in riskier spaces and alternatives. Key thing, if you can build it from scratch, you'll be able to audit and manipulate far faster than peers who just plug and play. You become more valuable at the junior level.
Not too far up the chain yet, but a lot of older guys in the industry don't even know how to anymore. Modeling matters less and less as you advance.
I don't see why this would hinder you from advancing in your career. The more senior you get, the less knowing how to model matters and the more having a high-level understanding of what would be driving the model an analyst is working on matters.
If you're looking at lateralling to another company in an analyst/associate role, yeah, it will likely hurt you if your modeling skills have gotten dull.
Modelling after analyst level becomes like elephant teeth... showing too much, using too less...
So evolving this question and not to hijack the thread, what are the skills (hard + soft) needed to advance to the VP and MD, and up level (beyond knowing how a model works and what the real drivers are, and knowing where the fluff, cook or bake is so you don’t buy into a bad deal, or need to change the strategy or fin structure to meet UW demands, etc)?
Some ideas that come to mind (keying off of Scott Adams belief that having 90 percentile ability in several key core, complementary areas leads to greater success and achievement as opposed to being in the 99 percentile in one area ie fin modeling):
.Risk analysis and management .Leadership skills .Sales/Negotiation/Persuasion science .Business Law/Property-Land Use Law (if development or property level) .Higher level re economics/market analysis/finance understanding .Team management/optimization skills .Next level networking/socializing/eq abilities
As a footnote, if you have your own lean acquisition shop (say you and another guy who complements your skill set and a controller/admin type), you will likely be modeling from deal sorting/analysis through investment committee equity-lp/debt presentation. I have seen this set-up more times than I can count. Being a “5 Tool Player” is incredibly important in this business (and if you peek behind the curtain of some very successful RE entrepreneurs they are very good, not elite, at 4-5-6 essential things).
If you want to use and develop your modelling skills, spend some time working for a large infrastructure or energy sponsor that habitually uses project finance debt. No two deals are different and you will genuinely be building out models.
Nobody else really does proper modelling it seems... M&A teams pretend they do but they might as well used a pen and paper given the level of complexity involved. Equity research the same. I’m qualified to make these comments as I’ve done all three.
You have to understand the mechanics behind it but yes its a waste of time to build models from the ground up for every project.
bump.
Do not be the guy that re-builds models and is continuously tries to tweak / change how things are done/presented. Easily the worst RE guy and one who doesn't get it.
Everyone has said it - modeling is a small part of the investment process. If you want a deal you make the model work - not vice versa. Younger RE folks rarely understand this.
But why is re-building models a bad idea? It is great practice. Every real estate deal is different and knowing how to build a model helps tremendously. Yes, it's not the core of real estate the same way sourcing is, but it's still an important part.
[EDIT: I wanted to clarify the above. I didn't mean to suggest that the analyst should re-build the model every time. I meant that as a training exercise I think there's a lot of value in rebuilding models on your own time/weekends. It is like working out in the gym. It is a way to get your modeling skills strong.]
It may be good practice, but it is both an inefficient use of time and welcomes potential calculations errors.
Maybe if you work for an incredibly interesting company. At most firms, a lot of deals are essentially the same minus a few key variables that you plug into an already built model.
I would say re-build if the new functions add real value missing from the current model. Don't build to introduce something with tiny incremental value. As CRE notes, it's little value gain that comes with risk of messing something up.
However, what is valuable is to use downtim to make sure that everything works properly in the model. Almost every model that I've ever been given has some serious mistakes when you start looking through the details. It's a real value add to make sure everything is working right and understand the building blocks of the model even if you've simply been handed something down built by previous analysts and associates at your firm. You will find mistakes almost guaranteed...
The woooooooorst RE guy.
The firm you joined has a track record or it wouldn't exist. Abide by it...
Yes and no. Don't trust your model just becuase you work at some fancy place and people have been using the model for years. You need to make sure that you understand it and that the model actually works right. I've seen tons of busted models by BBs when you get into the details.
I'd say most if not all firms have a standard model that is plug and play. You may have to make slight tweaks depending on the intricacies of a deal, but for the most part, as a professional, you really won't be doing much modeling from scratch.
This allows you to focus more on the important part - the actual inputs and understanding why you're using the inputs you're using.
Honestly, I occasionally still break out and reproduce my firms two models just to keep from getting rusty, and also because occasionally I stumble onto a way to improve it, but for the most part as long as you understand the mechanics of the model, thats all you need to know.
NOTE: I don't ever use the re-constructed models for work I'm submitting - as was already mentioned, this increases the chance of calculation errors and is unwise.
modeling is for monkeys
id say the biggest difference I've noticed between student models and pros is the presence of a qualified cameraman and a quality camera. sure, you may have the same picture, for guys this is the twisted torso with bicep flex, for ladies its duck lips and lumbar lordosis, but it looks way better taken with a nikon DSLR with proper lighting compared to a mirror selfie with an iphone.
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