REAL ESTATE FINANCIAL MODEL
Real estate analysis requires greater focus on cash flow analysis, detailed planning and financial
modeling to leap full tax benefit. It is a high risk investment, but if handled diligently the rewards are
great. One aspect of real estate investment is getting the price right when buying the property; this is a
determinant of how well the investment will perform. Also financing should be arranged inline to meet
the objective of the investment, by consideration whether the property is to be flipped soon or it is a
long term investment, the consideration ought to be factored when analyzing the project.
The Real estate excel template helps the user determine the financial viability of the property by
delivering the following outputs
Before tax cash flows
Income tax liability
After tax cash flow
After tax cash flow on resale
Tax savings on resale
After tax equity reversion
The decision criteria is based on valuation worksheet, the criteria on decision have to be based on net
present value or internal rate of return. A positive net present value indicates the project is viable for
investment; this is the basis of making decision. The internal rate of return is used to evaluate whether
the project meet the investors required rate of return.
The financing trick for investing in the project is to arrange with financier to apply payment to interest
on loan instead of principle, the advantage of the arrangement is based on the fact that interest is tax
allowable and principle on loan is not. This arrangement allows the investor to leap on great benefits
out of investments and avoid huge tax on capital gain when the property is disposed.
The real estate excel template helps the investor conduct three steps, the steps are cash flow
determination, equity tax reversion for evaluation on gain on sale and decision process to evaluate the
project viability based on net present value or internal rate of return. The manual work for the user is to
key in gross revenues expected to be generated by the property, expenses associated with revenues and
selling commission plus the effective tax rate. The template calculates the cash flows and presents the
net present value and internal rate of return.
The depreciation is calculated by dividing the cost of property by 39 years, 39 years is the allowed
straight line depreciation for commercial property. The equity reversion recoups back part of
depreciation because of tax treatment. There is tax on capital gain when a property is sold at a price
higher than the acquiring cost; this is taken care off by equity reversion process. The equity reversion
process produces the income after tax.
The system of determining the viability of the proj