Real estate financial modeling is a relatively new discipline, and as a result, the number of quality educational resources has been almost nonexistent until just a few years ago. Even just a few decades ago, institutional quality real estate investments were made using simple back of the envelope analysis. In other words, investors determined whether they would invest in a property after spending about 10 minutes with a simple calculator. Even big players like Sam Zell, based their investment thesis on back of the envelope calculations and intuition, and relied little on sophisticated discounted cash flow modeling.
In just a few decades, however, real estate financial modeling has developed and become somewhat standardized. In today’s environment, it is critical that every real estate player have a sound understanding of financial principles and real estate financial modeling. You will need to understand modeling if you are looking to invest alongside a sponsor, get any kind of real estate job, or do you own deals. In other words, you need to know how to model real estate transactions.
There are two key products for modeling real estate investments. The most used software solution is Microsoft Excel, the second product is Argus. Argus launched in 1985 and is the industry standard for complex real estate modeling. Most of the institutional players use a combination of Argus and Excel. Since Argus is quite costly, most small shops rely primarily on Excel.
Listed below are some of the best educational resources for improving your financial modeling skills.
REFM (Real Estate Financial Modeling) is probably the most developed and thorough real estate financial modeling platform. It was created by Bruce Kirsch in 2009 and is the industry standard for Excel-based real estate modeling. The program offers training courses, downloadable models – some of which are free, and a Certificate Program. It has live courses in New York and an online self-study program. Bruce is even a co-author of the latest version of the most popular real estate investment textbook (Real Estate Finance and Investments: Risks and Opportunities by Peter Linneman & Bruce Kirsch). They recently came out with the REFAI Course (Real Estate Finance & Investment Certification). This course isn’t cheap, but its ROI is significant due to the exeptional content. They not only show you how to model in Excel, but Dr. Linneman explains how and why things are done in practice. I learned a lot from the course. Get it here.
A.CRE is an online resource created by two very experienced real estate finance guys. It provides some educational resources, but its strength is in the number of quality models that are available for download. They have acquisition models, leasing models, development models, and portfolio models across all asset types. They have recently added a career section for job seekers and employers.
Argus provides a number of financial modeling tools specifically for evaluating real estate. Argus is used by many institutional investors, developers, and private real estate companies. It is the most advanced software platform used by real estate financial analysts. Argus provides product-specific training.
I would suggest starting your modeling education with REFM. As I mentioned previously, after completing REFM’s program, you will be able to add the certificate to your resume and LinkedIn profile. The new REFAI Program is awesome because you’ll not only learn how to build models in Excel, but more importantly, you’ll learn about how things work from one of the foremost Real Estate professors, Dr. Linneman. Adventures in CRE is a great place to find downloadable models once you have a strong understanding of real estate and real estate financial modeling. I would suggest learning Argus only if it is required to get a specific job, and after you have developed a strong skill set in Excel.
Even though real estate financial modeling has become a highly desired skill, it should not detract from the value that experience and intuition have on selecting profitable real estate investment opportunities. Even though Sam Zell and other old timers probably can’t utilize a complex financial model, their experience and intuition is still more valuable in selecting investments than a room full of Excel gurus fresh out of school.
Keep in mind, as you learn to model real estate investments, it is important to focus your learning on not just the technical aspect of crunching numbers, but the understanding of how to arrive at reasonable inputs and assumptions. It doesn’t matter how sophisticated your modeling skills are unless you are able to predict accurate assumptions. The ability to make accurate assumptions is the key to making real estate financial models accurate and valuable.
When I was just a few years into the business, I reached a point where I was looking at a few different job opportunities. I had two good job offers, one of which was focused on financial analysis, the other was focused on marketing, leasing, and selling property. I met with one of my mentors to discuss the two offers and get some advice as to which job would provided me with a more valuable skill set. Keep in mind he’s a Harvard MBA who owns a massive portfolio of real estate and businesses. He suggested that I focus my efforts on learning the supply and demand drivers of real estate. He said that anyone can learn how to plug numbers into a spreadsheet. The more valuable skill is understanding what tenants are looking for, how to negotiate deals, and what makes real estate valuable now and in the future. This is one of the reasons why I have focused my career on marketing, selling, leasing and negotiating transactions. In doing so, I get to know my customer and what drives them to make their real estate decisions.
My suggestion is to focus on understanding tenants and the drivers of real estate as you develop your financial modeling skills. Do everything you can to understand the users of real estate and why they make the decisions they do.
As this industry matures, the ability for one to be able to crunch the numbers will be absolutely necessary. That is why a solid foundation in real estate finance is vital to the success of any and every real estate entrepreneur. Let me know if there are any other educational tools I have failed to list on this post.