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Just curious as to how people are appraising their opportunities, be it simple buy and hold strategies or more complex development of varying degrees (refurb vs straight out ground etc). Are you guys using bespoke models or using crude spreadsheets/manual calculations?
Apologies if this kind of topic is not allowed but I currently work in private equity real estate where we build complex financial models to a) project returns and b) use these to secure funding and approval at IC
It strikes me that this kind of approach could translate well even for the private investor and I was hoping to find out what the appetite would be for a service which provided models?
To be transparent, I Am exploring the idea of creating a service that sells bespoke models to help investors understand their investments and also help raise finance by being transparent with banks. I am not trying to sell anything per say t just interested in seeing how people approach investments and conducting some research to see if this would be a viable venture.
Ps if anyone has a a development opportunity that they are currently contemplating I'd be happy building you a quick model to show you what a financial model could acheive. Happy to chat over private message and I wouldn't need to know anything other than your projected costs and strategy (rent and sell/flip) - the deal can remain 100 percent confidential by name location whatever you wish (but I'd obviously need some Base numbers!)
roi...taking both capital and revenue aspects into account as applicable, of course the time variable in there too...and then knowing what cash is left in at various timepoints. Could certainly do better on IRRs etc and better estimates of variances / uncertainty ranges. Would be interested to see what your models might show given some of our existent data for HMOs, major redevelopnents, new build etc.
So I guess your ROI is what we would call an equity multiple? That could be done very easily and you can explore the change in ROI given sensitivity in your house price growth forecast, exit yield and to a lesser extent time frame etc etc
Given you can flex the timeline at a flick of a switch, you can also run a sensitivity on your IRR. You could also run a sensitivity on timeline AND growth rates.
If you drop in some very basic assumptions, I can create a very quick on to demonstrate what can be shown.
RoI - cash tied up in deal vs net yearly rent - min 10%.
Plus location/desirability of house and long term perceived liability in the property (ie. possible maintenance works required etc)
I ignore potential capital growth, that’s something no one can predict.
Are you calculating these manually or eotgwcrude spreadsheets ? and would you find any benefit in a model which calculates this for you whilw also a aggregating your portfolio?
``I ignore potential capital growth, that’s something no one can predict.``
I like to include it . I dont like to ignore such a vital component of property investment
CG can be predicted along with all the other factors you mention like maintenance
If CG cannot be predicted what can be . Surely all factors are predictions - voids / interest rate rises/ taxes etc
There are no certainties . CG shouldn't be singled out in my view to be ignored
Its the degree of accuracy of the prediction which is hard to pin point yes but that shouldn`t mean it should be denied the opportunity to at least be included along with other factors when creating a business model
I predict house prices will be higher in 25 years time than they are today
I think 99% of people would agree with that
I think they will double within 25 years . I base my investment strategy partially on that
If I assumed there will be zero growth or even negative growth I would not buy nor maybe would others
The breakdown maybe 70% think it would be more than 30% growth in 25 years . Not unreasonable
90% think more than 10% and maybe only 5% think it will be more than 150% and so on
To ignore the fact some of my properties have doubled in value in a 7 yr period would not do my DD justice
I take that stat to predict the next 7 years . Maybe no growth then between 2018 and 2025
If 2026 saw 0.5% growth and i sensed a turnaround I might predict years 2027 - 2030 will be good growth
I may therefore aggressively buy late 2026 based on those predictions
My predictions would hopefully be supported by others whose full time job is to predict these things
So I say - include prediction parameters for capital growth when appraising an investment
Jonathan Clarke. http://www.buytoletmk.com
I predicted 10 years ago my flats would be worth £100000 more than what I paid for them .
According to zoopla valuations I am correct.
The reality however is very different.
CG is a fickle thing and not to be relied upon
Fortunately rental income has improved though not by much which is at least something but were it not for low interest rates then they would be barely washing their face.
New build flats are clearly very poor investments.
Taken 10 years for me to find out!!
CG is indeed fickle, along with interest rates, rents, tenants, the council, the chancellor and other stuff
We feed all the fickleness into our decision making apparatus
Nothing can be relied on - so we stress test on all data
We try to predict how they will all behave before we invest
If ones predictions are poor then we may stumble
We may predict poorly and that is unfortunate - but we ignore at our peril
I use capital growth as the cream on the cake Its great to have but its not my driver
I look at the cash I have injected into a deal and the return on that cash
I look for 8% yield on any project
I never sell property once I own it so yield on the total business is the KIng in my world
I personally use the yield on the Purchase price I don't use the inflated price if the property has gone up in value
Rents will always rise in the long term and capital growth will happen too so I know it will all work out well long term
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
I use a crude spreadsheet I wrote myself. Since I wrote it I understand its limitations.
Whilst I know there are errors in my method of calculating my returns I believe they are less the errors inherent in trying to predict retruns from most investments. So they are good enough for my purposes.
I understand the theory of how I could be more accurate, but I don't think it is worth the effort to me.I
I do not include capital growth in my predictions. I invested primarily to provide an income to live on. I plan to sell one property to benefit from the capital growth a former home, but I'll just have to take what I get when I do. For my other propeties it will just be a number with no practical use for years to come.