As in many other disciplines, the nature of real estate financial modeling is such that there are often multiple ways to solve problems within your spreadsheets.
All formulas that get you to the “right” (mathematically accurate) answer for the current details of the transaction being modeled are equally valid. It becomes difficult when one has to build a flexible formula that will return the right answer when some of the conditions in the transaction change, which they inevitably do.
As we become more skilled in modeling in Excel, we tend towards writing more complex formulas that combine multiple functions and logic strings to accommodate for such changes in transaction details.
Naturally, the formulas we write must be informed by common sense and reality, thus should only contain logic that addresses relevant scenarios. The way to build your formulas in this way is to employ conditional statement logic. Admittedly, these require more work up front, but will save your model from returning errors down the line.
For instance, are operating deficits being funded by equity in your income-producing asset acquistion model? If so, do your equity draw line items account for if and when operating cash flow turns negative? Or is the negative operating cash flow being funded by some phantom source of funds that does not and will not exist?
I have found that the real action in models always occurs in the equity and financing sections, so I encourage you to take extra care when constructing these line items in particular.
What are your thoughts?
