Second Real Estate Financial Model - First Development
Actual Second Financial Model
Our previous post discussed that we would need to develop a second model that more accurately described this real estate investment after we had received a revised design and more accurate contractor pricing. Our initial model was flat out wrong. Our bankers were willing to finance the increased investment. Was the risk worth the reward? Here’s our revised model for our development:
We would purchase the land in June and start construction in August. Construction would take 14 months and it would take 6 months to sell the property.
Land Price (Actual): $463,721
Down Payment: $25,000
Loan Amount: $438,721
Closing Costs: $6,580
Interest Rate: 5% (interest only)
Total Land Upfront Costs = $31,580
Home Size (Actual): 4,164 SF
Construction Cost (Actual): $249.22/SF
Total Home Cost (Actual) $1,037,750
Architectural Costs (Actual): $35,000
Dock & Rip-Rap (Actual): $40,000
Future Changes (Est.): $32,000
Down Payment: $0
Loan Amount: $1,144,750
Closing Costs: $16,200
Interest Rate: 5% (interest only)
Total House Upfront Costs = $16,200
Total Upfront Costs = $47,780
Sale Price of Home: $2,300,000
Less Real Estate Commission: <$138,000>
Less Land Loan Payoff: <$438,721>
Less Home Loan Payoff: <$1,144,750>
Less Total Cash and Interest: <$130,572>
Less Equity Payback: <$47,781>
Profit: $400,176
I have attached a spreadsheet for those of you who want to download the actual sheet we used to develop this model. Again, a lot has been learned since then and our models have become much more inclusive. The spreadsheet is provided for educational purposes only. I take no responsibility for its use by others. (Don’t you hate that our society has become so litigious that we have to rely on disclaimers.)
The Real Estate Model Investment Decision
So what would you do? The key to this entire model is the assumption that we can sell this place for $2,300,000. The highest priced home sold on this lake to date that was done on spec was sold for $1.7 million. This was a 35% increase in the highest home sold to date. Big decision here. My partner and I were both jointly and severally liable for the loans. Again, what would you do?
My next post will walk through our decision and the reasoning behind it.
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Thanks for sharing your work in the spreadsheet, it is much appreciated. I think you could learn a lot from the following article that outlines some key tips and tricks in regards to flexible and professionally presented infrastructure for cashflow models.
http://www.navigatorpf.com/Current_Topics/Financial_Modelling_for_Project_Finance/Flexible_timing_infrastructure_in_a_project_finance_model/
One often overlooked property of a financial model is that it has to give confidence to third parties, including lenders and investors, about the project. To achieve this, using best-practise standards are always an easy way to go.
For more detailed tips, have a look at the following site which give you a list of some very common mistakes.
http://www.navigatorpf.com/Current_Topics/Financial_Modelling_for_Project_Finance/Project_Finance_Modelling%3A_Top_ten_mistakes/
Hope it helps and makes you project more successful!
I checked both of the links you posted. Very good information on structuring financial models. Thanks for commenting. I hope you check back periodically and see how our models eventually changed.
[…] presents Second Real Estate Financial Model - First Development posted at Actual Real Estate Profits, saying, “This post discusses a financial model used to […]
[…] presents Second Real Estate Financial Model - First Development posted at Actual Real Estate Profits, saying, “This post discusses a financial model used to […]
I found your blog via Google while searching for real estate finance questions and your post regarding d Real Estate Financial Model - First Development looks very interesting to me. I was impressed by your site and offerings. I was looking at some of the articles and it really impressed me. All I can say is congratulations on creating this site and what took you so long? I look forward to returning.
Appreciate the comments. Hoping some people can learn from my experiences prior to putting down their own cash. It was really tough finding any info on the web that walked through the actual process. Plenty of generic information out there, but little I could actually put to use.
thats really awesome post really.