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Bruce Kirsch
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What It Means To Do Good Financial Analysis On A Commercial Real Estate Deal (Part 2)


What are the three most important things to remember when doing financial analysis on a deal?

1. If you put Garbage in, you’ll get garbage out.

If your assumptions are garbage, then the calculated outputs based on those assumptions will also be garbage. So you need to be honest and strict with yourself and make sure that all of your inputs are recent, relevant, reasonable and reliable. While this “GIGO” acronym is hackneyed, it’s so worn, because it’s very right and very important.

2. Use your common sense judgment.

If you are using Microsoft Excel, you need to sanity check your outputs. It’s unfortunate but true. Excel will always carry out your instructions perfectly, meaning that if in your formulas you tell it to do the wrong thing, it will loyally execute on your wishes, not knowing, wanting or caring that it should tip you off that you’re calculating something incorrectly. So when you consider the model to be “done”, go away from it for a few hours, then return, print an investment summary and review it at the broad strokes level. Ask yourself questions like, “Is it reasonable to invest $X and get $Y back in Z amount of time?”, “Did I pay back the loan in full?” and “Where could I be wrong?”.

3. Consider the minutiae, but don’t get lost in it.

There is a notion of being “precisely wrong”, which means that you have accounted for everything, and everything is wrong, so what’s the point of having accounted for it all in such great detail? Well, the benefit is that the rigor of the detailed financial analysis process serves as a thorough checklist of items that you need to consider to comprehensively understand the nature of the investment. So it is important to strive for a detailed understanding of the story. But for the thousands of hours that I have spent knee-deep in monthly-based Excel spreadsheets with hundreds of line items, where I achieve real clarity of vision is when I look at the annual cash flow report and read it from top to bottom, left to right.

A financial projection is a story about money, that’s all. If the story seems far-fetched or too good to be true, it probably is, and you shouldn’t believe it. Remember, no one can knowingly tell you a true story about the future.

For the past 5 years, I have been running a company called Real Estate Financial Modeling (REFM), and even recently built a web-based software platform called Valuate for detailed monthly projections and intuitive, big picture reporting. Having run analyses for multiple billions of dollars of real estate deals at REFM in Excel and Valuate, here’s what I have learned.

  1. The key is to steep yourself in the details and then be able to take a step back, get out of the weeds, and determine as a businessperson if the numbers make sense.
  2. Ask yourself, “Do I believe this is what is likely to happen? With what level of confidence do I believe it?” As formidable as Excel is, your human brain is more powerful… at least for now.
  3. Here is an example of an analysis I did that tries to accomplish both detailed and high level aims.


Filed under: Real Estate

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