What (is a modelling test?): A cash-flow forecast of a real estate investment to numerically assess the risk-return profile of a potential opportunity.

Why (are they asking you to undertake a modelling test?): Excel-based modelling tests are used to understand the level of understanding a candidate has in real estate investment in addition to how well they can perform under pressure with tight deadlines. 

How (do you run a model?): Think of running an appraisal like buying your first flat, there are four key components: 

1. The Purchase: The price you pay plus the costs to acquire (taxes & agent fees). 
2. The Operation: The costs of running the investment, some of these are recoverable from the tenant and some are not. 
3. The Sale: How much will you be able to dispose of the asset for when it comes to selling, what costs are involved? Are there taxes to pay? 
4. Financing: Most of the real estate market uses debt or “leverage” to invest in real estate. How can these magnify the returns (for better or worse). 

The thought of undertaking a modelling test for a prospective employer can be daunting.

Rest assured, the purpose of the modelling test is not to trip you up! 

Your prospective employer wants to ensure that they understand what it is they will actually be paying for. The modelling test is a sure-fire way to verify technical ability and whether this coincides with what you have included in your CV. 

Your new employer will use the model as an opportunity to benchmark your ability and competency in line with the existing talent employed at the company. From an employer’s perspective, they want to understand how you will add value to their firm and where you can fit within the team. 

However, the question remains, how can you set yourself apart from the competition during an excel modelling test? 

Of course, the difficulty of any modelling test will vary depending on the seniority of the position. We have broken the test into four salient points, which, if followed, will leave a significant lasting impression on your prospective employer, regardless of your experience: 

One – Dynamic & Flexible 

• Ensure that your model is as dynamic and/or as flexible as possible, even if this is not required or, indeed, specified. This means being extra cautious with the formulas that you use – avoid using numbers within your formulas! 
• If you put in the wrong assumptions and inputs then having a flexible and easily manipulated model can alleviate the issue quickly and efficiently, this in turn will exhibit problem solving and other desirable qualities to an employer. 
• Creating a dynamic/flexible model within your test will demonstrate your clear ability to perform the task at hand. 

Two – Time

• Do not be overwhelmed by the imposed time restrictions. Many modelling tests are designed to be unrealistically complicated or ‘time short’. In some cases, many models are created with the intention or expectation that you will be unable to finish in the allotted time period.
• You may run out of time; however, your prospective employer wants to understand and visualise the logical path and direction you have chosen.

Three – Formatting and justification 

• • Much like the old adage “You only get one chance to make a first impression”; your modelling test is no different. First impressions last! If your spreadsheet is well-formatted, easily comprehensible, and visually pleasing, it demonstrates that you truly understand the brief. 
  • Therefore, alongside ensuring that your model is dynamic, it is great practice to clean up your formatting and justify assumptions. 

• Justifying or elaborating on why you have made such assumptions is an impressive way to demonstrate your wider market knowledge! 

• Take the time to learn excel shortcutting formats, ensuring that your formulas are conditional and simply presented. By avoiding onerous formulas, you can ensure that your model is much easier to follow. 
• Thought process matters a lot in the eyes of your future employer. The more clarity you can give over why you took actions and made specific assumptions, the more you can demonstrate that your work product is clean and clear. 
• Lastly, something that can be somewhat overlooked. Make sure your font type and size is consistent throughout!  

Four – Do not panic! 

• Work as succinctly and clearly as possible, demonstrating a logical path is imperative. 
• Keep it simple! If you are asked to create a quarterly model, build a quarterly model! 

To conclude, if you can create a dynamic/flexible, well-formatted, and realistic cash flow model, in which you have demonstrated your knowledge of basic real estate metrics (Cap Rate, IRR etc.) you will be well on your way to making a lasting impression and securing your dream role! 

Why not challenge yourself to build a bespoke and dynamic model from scratch using our example here! 

NB* – 

Do you know how to model debt (bullet payment, interest roll-ups or equity drawn first on construction loans), waterfall, and LP/GP distribution hurdles? 

If your answer to this question is yes, then brilliant! You are well on your way to impressing your future employer. 

If your answer is no, why not? Granted, this may not be a part of your current day-to-day role. However, to truly stand out, take the opportunity to up-skill/educate yourself and, ultimately, become more employable. 

If you are in need of training or improving your modelling skills take a look at Farley Cove, a brilliant and Rockbourne recommended Real Estate Modelling course!