Creating financial models is a skill. Building a range of financial models across a variety of businesses is the only way to develop your craft. Let’s look at a model for an investment that most people can afford: an investment UK properties .
Before we begin developing a financial model, we need consider what motivates the business we are investigating. The response will have a huge impact on how we build the model.
Who Will Make Use of It?
Who will use this model, and what will they use it for? A corporation may have a new product for which they need to determine the best price. Alternatively, an investor may wish to plan out a project to determine what kind of return on investment he or she may expect.
The eventual outcome of what the model calculates may differ greatly depending on these conditions. Unless you know exactly what decision the model’s user has to make, you may have to restart multiple times until you find a strategy that leverages the right inputs to find the suitable outputs.
Then there’s real estate.
In our instance, we want to know what kind of financial return we may expect from an investment property based on certain information. This information would include variables such as the purchase price, the rate of appreciation, the rental price, the financing terms available for the property, and so on.
Our return on investment will be determined by two key factors: rental revenue and property value appreciation. As a result, we should start by projecting rental revenue and the value of the property under discussion.
Once we’ve completed that component of the model, we can utilise the information we’ve gathered to determine how we’ll finance the property’s purchase and what financial expenses we can expect to incur as a result.
Then we’ll look at the costs of property management. We will need to apply the property value that we anticipated to calculate property taxes, so it is critical that we build the model in a specific order.
With these estimates in place, we can start piecing together the income and balance sheets. As we put these in place, we may notice items that we haven’t yet computed and will need to go back and add them where they belong.
Finally, we can utilise these financials to estimate the cash flow to the investor and determine our ROI.
Model Construction
We should also consider how we want to arrange things in order to maintain our desk neat. One of the best methods to arrange financial models in Excel is to put different elements of the model on individual spreadsheets.
Each tab can be given a name that describes the information it contains. This manner, other model users will have a better understanding of where data is calculated in the model and how it flows.
Let’s use four tabs in our investment property model: property, finance, expenses, and financials. The tabs for property, financing, and expenses will be where we input assumptions and make estimates for our model. The financials tab will serve as our results page, displaying the output of our model in an easy-to-understand format.
Ayana Properties is a top-tier UK estate agency with offices in the Middle East, Africa, and India. Its award-winning and highly skilled staff provides professional guidance on purchasing, investing in, and managing real estate in London, Manchester, Birmingham, and other parts of the UK.
