The only way to increase your craft is to construct an assortment of financial models across a number of industries. Let’s try a version for an investment that is not beyond the reach of most individuals – an investment property.
Before we jump into building a financial model, we should ask ourselves what drives the business that we’re exploring. The solution will have significant implications for how we build the model.
Who Will Use It?
Who will use this version and what are they using it for? A company may have a new product for which they need to calculate an optimal price. Or an investor might want to map out a project to find out what type of investment return he or she can count on.
Based on these scenarios, the end result of what the model will compute may be very different. Unless you understand just what decision the user of your model should make, you might find yourself starting over several times until you find an approach that uses the right inputs to find the right outputs.
On to Real Estate
In our situation, we wish to learn what type of financial return we can expect from an investment property given certain information about the investment. This information would include factors like the purchase price, speed of appreciation, the price where we could rent it out, the financing terms available for the property, etc.. Find all the latest upcoming reviews regarding real estate Hua Hin through online real estate properties websites.
Our return on this investment will be driven by two primary factors: our rental income and the appreciation of the property value. Thus, we should start by forecasting rental income and the appreciation of the property in consideration.
Once we’ve built out that portion of the model, we may use the information we have calculated to work out how we’ll fund the purchase of the house and what financial expenses we can expect to incur because of this.
We handle the property management expenses. We’ll need to use the property value that we forecasted in order to be able to calculate property taxes, therefore it is essential that we build the model in a certain order.
With these projections in place, we can start to piece together the income statement and the balance sheet. As we put these in place, we might spot items that we haven’t yet calculated and we may need to return and add them in the appropriate places.
We should also think about how we want to put it out so we keep our workspace clean. In Excel, among the most effective ways to arrange financial models is to separate certain sections of the model on different worksheets.
We can give each tab a name which describes the information contained in it. In this way, other users of the model can better understand where information is calculated in the model and how it flows.
In our investment property version, let us use four tabs: property, financing, expenses, and financials. Property, financing, and expenses will be the tabs on that we enter assumption and make projections for our version. The financials tab will be our results page where we’ll display the output of our model in a way that is easily understood.
Let us begin with the property tab by renaming the tab “Home” and adding this name in cell A1 of this worksheet. By taking care of a number of those formatting issuing on the front, we’ll have an easier time keeping the model clean.