Real Estate Investment Modeling

Understanding how equity is built, and having awareness of how negative and positive cashflow can be generated, it's time to add time to the equation. This will allow us to model an investment and see how it's performance can change.

Investment Outcome Relative to Time

With our understanding of our cashflow, let's look at how they change with time

• Time Independent - Our Startup Costs are time independent. They don't increase or decrease as time varies.

• Linear with Time - Things that scale in portion with every increment of time. These are our mortgage payments and rental income saved

• Variable with Time - Things that with every increment of time, have a different outcome.

Yearly Investment Performance

Modeling of our cashflows relative to how they relate to time, we get the following:

	Startup Costs	Exit Costs	Costs of Business	Revenue	Ending Balance
Year 1	-$19,100.00	-$30,600.00	-$4,994.00	$16,008.71	-$38,685.29
Year 2	-$19,100.00	-$31,212.00	-$10,071.30	$32,588.02	-$27,795.28
Year 3	-$19,100.00	-$31,836.24	-$15,237.73	$49,764.79	-$16,409.18
Year 4	-$19,100.00	-$32,472.96	-$23,669.53	$67,567.37	-$7,675.13
Year 5	-$19,100.00	-$33,122.42	-$25,863.38	$86,025.68	$7,939.88
Year 6	-$19,100.00	-$33,784.87	-$31,336.42	$105,171.34	$20,950.05
Year 7	-$19,100.00	-$34,460.57	-$36,926.29	$125,037.69	$34,550.84
Year 8	-$19,100.00	-$35,149.78	-$42,641.17	$145,660.00	$48,769.06
Year 9	-$19,100.00	-$35,852.78	-$48,489.81	$167,075.51	$63,632.92
Year 10	-$19,100.00	-$36,569.83	-$54,481.57	$189,323.55	$79,172.14

Interpretation of Investment Model Results

Looking at the results from our calculations we can infer a few things:

• Validation of 5 Year Rule - We can see that at the 5 year mark that our investment turns from negative to positive. Showing that in general the 5 Year Rule holds some truth to it.

• Significant Fixed Costs - Our Startup and Exit Costs take up a large portion of all costs incurred during our investment. Even at the 10 year mark, they still make up more than 50% of all expenses.

• Profitable YoY - That if we look at our ongoing costs compared to the value generated by our investment, year-over-year it consistently outperforms our costs.

Reminder that these results are based on the assumptions we made in the previous section. These assumptions may be inaccurate or could change at a future point under different market conditions, and such changes could result in the above results being no longer valid

In Summary

We've looked at what's under the surface to what we mean when we say "building equity." Bringing our understanding of equity into the picture, we've looked at each of the pillars that come with a given real estate investment. And lastly, we've seen how our real estate investment is anticipated to play out over time by modeling it.