The Investing Series Pt. 2: Excel Investment Analysis With Cash Financing
It’s also important to discuss your project’s hard and soft costs. While this spreadsheet analysis does not include a construction budget, you should be prepared with cost estimates for your investment if you plan to acquire land and build on it, rather than purchasing an existing building. The table below demonstrates some of the hard and soft cost factors, which you would need to incorporate into your analysis if you plan to prepare a comprehensive budget for your project. Your project may not involve all of these elements, but you can choose the most significant factors for your development purposes.
The “quick and dirty” analysis provides a soft cost factor as a percentage of your budget’s hard cost factor. The total hard costs (cell C20) are calculated by multiplying the hard costs per square foot (cell C5) by the total square footage of the project (cell C16). The resulting number (cell C20) can be multiplied by a soft cost percentage factor (cell C9) to arrive at the total soft costs (cell C21). To add the cost of land (cell 22) to your budget, if applicable, you should multiply the land costs per door (cell C12) by the number of units in your project (cell C4).
In the Revenues section of the analysis, you can use the vacancy rate that you expect to encounter for your project. It is equal to 1 – the occupancy rate (cell C14). You can multiply the total revenue (cell F4) by the vacancy rate to arrive at the vacancy amount (cell F5), which you should then subtract from the total revenue to calculate your expected gross income (EGI). From that number, you can subtract your annual operating expenses. To calculate the annual operating expenses, you can multiply the operating expenses per door (cell C11) by the total number of units (cell C4). The annual net operating income (NOI) in cell F9 is then calculated by subtracting the annual operating expenses (cell F8) from the EGI (cell F6).
Finally, you can calculate your entry cap rate by dividing your NOI by your total project costs (cell C23). In the spreadsheet, cells F23 and F24 can be filled out when you have a better idea of your project’s stabilized value and your property’s market risk level. Remember that cap rates vary based on a property’s type, position within a local market, and property risk level. Since cap rates are directly proportional to risk, this means that if the risk associated with a property is great, the cap rate will also be higher than expected. If you plan to sell the property in the future, your exit cap rate will most likely be different from your entry cap rate. In the “quick and dirty” analysis, you will notice that the entry cap rate (cell F12) and the return on investment (ROI) number (cell F15) are the same. They are only ever equivalent to each other if you are financing a property with cash. If you plan to obtain debt financing for the property, these numbers will be different. However, this article’s analysis applies primarily to rental properties financed with cash.
There’s plenty of more information about other factors related to property investing, such as how to calculate ROI for property investments, so take advantage of the many tools available out there!