The traditional way to model real estate assets and funds has been by using Excel spreadsheets. Excel is a customizable way of building a model from scratch and can handle any layout, structure, calculation, or format. Excel is also transparent – formulas are available to trace the calculation logic.
However, Excel model calculations are prone to errors. A company that has built its in-house financial models might have nobody consistently supporting, testing, and further developing those models. When the person who initially built the models leaves the company, the next person taking charge might not be willing or capable of supporting, testing, and further developing the models.
Excel falls short when modeling complex sets of data. Usually, the real estate modeling case needs to model property, company, loan, and derivative instruments, where hundreds of objects must pass cashflows to each other. Excel models must cross-link from workbook to workbook or sheet to sheet, or one huge model must be built into a single workbook. Maintaining and updating such a complex Excel system over time will be difficult in practice.
Updating data to Excel models. Real estate cash flow models require entering lots of input data and assumptions. Rent rolls, budget cash flows, historical cash flows, leasing assumptions, macro economy forecasts, loan data and more. A VBA code solution is usually needed to upload all that data to Excel models efficiently. Source data is located in the user company’s database systems, their partner company’s database systems, or in Excel files. Updating the models time after time is not a one-time job but should be done consistently, at least monthly. Manually uploading the data to Excel models requires effort and results in a bunch of Excel cash flow model files in folders on the user’s computer or network drive.
Financial modeling software is a specialized web or desktop application designed to assist businesses and professionals in creating detailed financial models and conducting complex economic analyses. It enables users to assess real estate investment opportunities, track realized financial performance, anticipate future performance, examine scenarios, and make wise decisions based on data-driven insights. Best real estate financial modeling platforms offer user-friendly interfaces with pre-built and customizable cash flow model templates, covering various financial topics such as real estate asset valuation, rent and expense forecasting, loan and hedging forecasting, risk analysis, and scenario testing.
Financial modeling software contains standardized and heavily tested calculations, avoiding calculation logic errors. Unlike in Excel models, end users in financial modeling software cannot accidentally destroy the calculation logic.
Cash flow modeling of complex data sets in financial modeling platforms doesn’t require cross-linking Excel workbooks but occurs naturally via the software code. Best platforms offer a user interface where cash flow models can be cross-linked via an easy visual interface.
Creating and saving scenario calculations in financial modeling software is more convenient than in Excel. Financial modeling software allows you to create new scenarios using another scenario as a base. Each scenario will be saved to the database. In Excel modeling, creating more scenarios results in more Excel files, and comparing scenarios to each other becomes tricky in Excel.
Financial modeling software can be integrated into source data systems. This allows automatic data import into cash flow models without any manual work. The more often cash flow models need to be updated, the more valuable automatic data import becomes, as it saves lots of time for the end user.
Some financial modeling software platforms can import and display property and other market data from reputable market data vendors via integrations with such vendors. In real estate cash flow modeling, the cashflow models require assumptions like yields, market rent estimations, and leasing assumptions, and it is a valuable capability if the platform can bring those directly to the user’s screen and even plug into cash flow models.
In Excel-based cash flow modeling, the user often has several cash flow model files in a folder and a consolidation Excel file consolidating cash flows from those standalone files. This is not a convenient approach often.
Add to this the need to create various scenarios from this set of files, and the user has to create another set of the same files with different assumptions. The problem is now even more inconvenient.
However, there are not any Excel files in financial modeling software. Still, all cash flow models are located in a single database, and the platform offers a visual interface where each model can be linked to another model by the end user. Users can make duplicates of this setup to create new scenarios. Simulating variables from the top (macro economy) level is easy as cash flow models and the modeling structures recalculate themselves quickly.
There are several financial modeling software platforms available on the market. How to choose the right one that fits best to your particular use case?
Some platforms are intended to cash flow model any industry, and some are tailor-made to specific industries, such as real estate. Products designed for a specific industry contain industry-standard calculation techniques. In real estate cash flow modeling, the industry specific product is more or less a must as it will be hard and time consuming to build up a deep real estate forecasting engine in a generic cash flow modeling platform.
Some platforms are black box systems, and some provide transparency in calculations. Black box system internal workings or code structure is not accessible or visible to the user. Users will see the calculated values but not understand how they are calculated. The preferred approach is a transparent system that allows you to see the calculation logic.
Some platforms allow only fixed cash flow models, while others offer fixed and customizable ones. The latter is usually the preferred approach in real estate as each country has its calculation standards and KPIs, and each real estate investment structure vehicle needs unique cash flow modeling logic.
Software platforms are a little bit harder to use than Excel models. Therefore, the software you choose must offer a clean and easy-to-use user interface, good support from the vendor, and supporting documentation.
One big value of software comes from its ability to integrate into other source systems. Always inspect how capable the software you are planning to take into use is of integrating into other systems, reading data in, or sending data out.
Software platforms come with setup and recurring costs. Setup cost occurs when the platform is onboarded to you. Recurring costs are the subscription fees to the platform. It is important to analyze the total value of the platform against those costs. The value must exceed the cost, preferably multiple times.
A smooth transition from Excel to financial modeling software involves careful planning, effective communication, and proactive management. Here are some best practices to ensure a successful transition:
Start with a comprehensive planning that includes defining objectives, identifying key stakeholders, and establishing a project timeline. Outline the scope of the transition and set realistic goals. Gain support from top-level executives and key decision-makers within the organization. Seek input from end-users, finance teams, IT professionals, and other relevant parties to ensure that the chosen financial modeling software meets their needs.
Communicate the transition's reasons, benefits, and how it aligns with your organization's goals.
Conduct a pilot implementation with a small group of users or within a specific department. Use this phase to identify and address issues, gather feedback, and make necessary adjustments before scaling up the transition.
If the software platform supports customized cash flow models, look up your existing Excel cash flow models and be ready to present them to the software vendor that will customize them to the platform.
Develop a data migration strategy to accurately transfer your existing cashflow model data from existing Excel models and database systems to the new software database. Verify data integrity and completeness during the migration process.
Think about what your source systems contain data that the financial modeling platform requires. Ensure your existing systems can provide their data outwards. Most systems allow file exports (Excel, CSV, or other formats). Some systems offer API as well.
Develop a comprehensive training program to ensure users are well prepared to use the new financial modeling software. Offer training sessions, workshops, and documentation to support skill development.
Excel file-based cash flow modeling is flexible and transparent, but it has too many weaknesses in the process the larger the portfolios to model become. Financial modeling software revolutionizes the real estate investment landscape by providing a calculation error-resistant platform for creating detailed financial models. Its distinct advantages include standardized and customizable calculations and eliminating the risk of errors present in Excel models. The software allows cross-linking cashflow models, ensuring users' seamless and efficient experience.
Integrating financial modeling software with source data systems enables automatic data import, saving valuable time and enhancing accuracy. The capability to effortlessly create and save scenarios further distinguishes these platforms, overcoming the challenges of managing multiple Excel files.
Financial modeling platforms come with a cost, but the value received from them over time can exceed this cost multiple times. The larger the portfolio to manage, the more complex the financial modeling structure is, and the more often data must be updated, the more the value usually from the financial modeling platform grows accordingly.
About the Author
This article was prepared by Markus Asikainen, CEO of Exquance Software, where we specialize in advanced financial modeling solutions. If you’d like to discuss how Exquance can elevate your financial modeling beyond Excel or have any questions, Markus would be happy to connect. You can reach him directly via email at markus@exquance.com, by phone at +358 50 547 8572 or via LinkedIn.
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Country-specific cash flow models
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Data via integrations
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