![]() ![]() ![]() Excel Formula #2: IRR/XIRR – Internal Rate of Return What does this mean? It means that there is a big difference between the discount rate of 7% and the internal rate of return (IRR), which is the next function that real estate investors should be familiar with. The result of this calculation is $319,590. Using the sample pro forma above, the NPV of the cash flows (assuming a 7% discount rate) can be calculated by replacing the variables in the above function with the actual cash flows as follows: The “ NPV” function calculates the net present value of a series of cash flows by using a discount rate and a series of future cash flows. Excel Formula #1: NPV – Net Present Value To create the pro forma and analyze a property’s projected cash flows, there are five Excel functions that all investors should be aware of. When complete, the pro forma may look something like this: This value is subtracted from NOI to determine the cash available for distribution (sometimes called pre-tax cash flow), which is another key investment analysis metric. Next, a property’s debt service is calculated using the loan amount, interest rate, and amortization period. This is a critical input to a property’s valuation calculation. Gross income less operating expenses equals a key real estate metric known as Net Operating Income (NOI). Separately, ancillary fees are obtained from a property’s historical operating statements.Įxpenses are obtained from a combination of the property’s historical financial statements and the actual invoices for things like property taxes, insurance, maintenance, and property management. These documents provide key information about things like the lease start date, end date, rent amount, and rental escalations, if any. Rents are obtained from reviewing the property’s rent roll and/or individual leases. Pro forma income is derived from tenant rents and ancillary fees. But First, It Starts With the Pro FormaĮvery financial model starts with a pro forma, which is an estimate of the property’s income, expenses, and debt service for the entirety of the planned investment holding period. In this article, we explain five Excel formulas for real estate analysis, including net present value, internal rate of return, payment, date difference, and sum and average. As it relates to private real estate analysis, there are five formulas that all investors and analysts should know to fully understand an investment’s risk/return profile. For this reason, it is common to use a spreadsheet tool, such as Microsoft Excel, to assist with real estate analysis.Įxcel is a powerful program that can perform a near-infinite number of calculations, but there can be a learning curve for those unfamiliar with the nomenclature and actions needed to get the most out of the tool. There are numerous variables to consider, and an abundance of complex math to perform. While the concept is relatively simple, the real estate analysis itself can be much more complicated in practice. Fundamentally, private commercial real estate analysis seeks to compare the cost of an asset to the cash flow that it produces. ![]()
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