How Granular are your Real Estate Models and Analyses?
Hi all,
Been looking at this topic over the WSO forum, but couldn’t find anything, so thought of raising the question myself.
I constantly find myself doing a lot of granular analysis on behalf of senior team members on potential acquisitions due to the constant big yield spread between sellers and buyers, and trying to get nearer to what the seller is asking for.
At the moment I am going over modelling earn-outs, different types of waterfalls, potential value-add refurbs that could improve the NOI, and at the same time informing on what the untrended / trended development yield is, how much the business would earn based on a JV structure, modelling tax, and on top of it all doing all the research, putting together some quite detailed presentation on demand, supply and opportunity related details (mainly DD and what still needs to be done). Most of the models are now becoming very bespoke and my weeks are slowly becoming more and more long, closing in on nearly 60 hours a week.
I am wondering for those working as analysts / senior analysts / associates in the REPE sphere, do you tend to go through the same level of granularity in order to come to a conclusion, or are your analyses a bit more light, meaning you focus on the basics (IRR, Equity Multiples, partnership CF) and try to close the transaction asap and move onto the next opportunity?
FYI I work at a REPE firm doing development, and is also an owner / operator of a few portfolios.
Based on the most helpful WSO content, here's what you need to know about the granularity of real estate models and analyses in the REPE sphere:
Granularity of Analysis:
Workload and Hours:
Comparison with Other Analysts:
Professional Insights:
In summary, the granularity of real estate models and analyses in the REPE sphere can be quite detailed, involving various financial and operational aspects. The workload can be significant, but efficiency improves with experience. The level of detail can vary depending on the firm's practices and the specific transaction requirements.
Sources: Starting in Real Estate Development, Q&A: 2nd Year REPE Associate, Those who left RE, where did you end up?, What kind of money can you make in Real Estate? What are the best roles? REPE, Brokerage, REIT, etc., Blackstone RE Analyst
Bump nice question
What you have listed I would consider standard analysis and not granular
Seconded. This seems pretty standard as you go through DD or even prior to IC approval to make an offer. Will say we have been spinning the wheels a lot more on deals we know we won’t be competitive on to see if we’re missing something. That’s been fun (not).
Thanks for your comments guys. I think I must have written the question right before bed time, and missed out on clarifying the granularity I am referring to at the beginning of my question.
The granularity consists of: amending and adding additional layers of inputs and calculations for taking into account seasonality of income, different occupancy rates per season and year, modelling variable costs based on occupancy and seasonality, as well as forward looking cost curves (such as electricity, transmission costs and consumption), additional potential value-add works, such as adding several partition walls to create additional rooms and improving fit-out, which would hopefully boost rental growth, however you would also need to grow the cost base because of the additional tenants that would have to use the services, etc..... Without mentioning that most of these additional works carry a development risk which could backfire tremendously.
All I am trying to figure out is whether all the above is actually necessary if all you're trying to do is get closer to what the seller is hoping to get, when in reality a model is needed to make an informed decision. In my opinion, you already know you're at fault when you're trying to engineer a model to make it work with a targeted purchase price.
But yeah, curious to hear how you guys carry out your own analyses to find out what else I could do in addition to the above ;)
Thirded. Nothing here sounds like unusual analysis, although on larger deals we'd probably have a second analyst on it to split up the modeling and research/memo drafting.
agreed
if the deal does not work on a napkin, it will not work with the most detailed modeling. Keep it simple
This. 1000x this!
Your model has absolutely no value. Whether you spend 15 minutes or 15 hours turning it into the most perfect tool for real estate evaluation that has ever or will ever exist, your model will never earn you an additional dollar in revenue or save you a single dollar of expense.
Layering in seasonality of income or whatever is a waste of time. You make money in real estate by managing and operating the property. If that isn't how you are driving value, then you're not really a real estate professional, you just are gambling on macroeconomic or local trends. Your underwriting model should tell you whether or not a deal makes money with a pretty simple set of inputs. What is your rent roll? What are your operating expenses? How expensive is the asset, and what does the financing market look like.
After that its meaningless.
You're definitely oversimplifying a bit here... What about value add deals? If I can backfill a massive vacant anchor at a retail property or execute a full renovation of the building's units in a multifamily deal, I absolutely need to model those and account for the time it takes to execute those business plans.
Yes, extremely granular modeling is dumb, but there's value to more than a back of napkin analysis.
I don't know why I thought about it until now. It isn't about the deal penciling on a napkin. It is about the multiple scenarios that could expose you to loss. When you model granularly, you can look at what happens on a downside case for more probabilistic outcomes.
Sounds more like you just inherited a poorly created model.
Let’s just say there was no model at all haha
piggybacking - but I am always perplexed at monthly cash flow models with 120 columns for a 10 year hold. I can understand if your hold period is 1 year or if there is a development period where cash flows will be wildly different, but for stabilized/light value add models, monthly cash flows are unnecessary brain damage, but most firms seem to model that way.
disagree 100% - monthly is borderline essential for any level of sophistication and/or partnership. annual IRRs compared to monthly can be off literally 100s of bps, which....kinda matters?
If monthly and annual IRR is the difference between a deal penciling on a 10 year hold, i'd argue its not a good deal to begin with
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