A Student of the Real Estate Game


How Professor Roger Staiger Teaches Real Estate Financial Modeling

Feb 17, 2016 | Career

For students and young professionals just getting started in the business, learning to model real estate transactions in Excel is the single best way to differentiate yourself from the competition to land that job or stand out within your company and get promoted.

Today, I literally have the guy who wrote the book on modeling real estate deals in Excel. Roger Staiger, author of Foundations of Real Estate Modeling shares insights into his book, characteristics of good financial modelers, and his best advice for learning real estate financial modeling.

Enter Roger:

Roger, for the ASotREG readers, can you provide a quick background on yourself? What inspired you to pursue a career in real estate? What’s one thing that most people don’t know about you?

Foundations of Real Estate Financial Modeling

Professor Staiger’s Text

Nothing inspired me to pursue a career in real estate, I actually fell into the field. I was head of retail commodities for Constellation Energy when a recruiter called me looking for a hard to fill the position.  It was CFO for a regional homebuilder and the job requirement was a deal maker with significant education.  The quirkiness of the owner and the president matched my personality and my education met their requirements.

I learned quickly that real estate embraces original thinking much more than any other discipline as the projects are each unique given land characteristics, financing, etc. There are virtually no barriers to entry and one can start in real estate with no more than a pickup truck and a hammer.

After several years I quickly learned that combining my commodity knowledge with the physical asset real estate was literal gold. In 2007 it enabled me to see the inflection point of residential and quantify the relationship as a leading indicator of commercial.  Understanding physical and financial markets for real estate remains unique and profits remain monopolistic.

Most people do not know that in my youth I was a successful competitive dancer. When I tore my knee in 2006 I retired and started gaining weight.

What inspired you to write the ‘Foundations of Real Estate Financial Modelling’? What was the biggest challenge of writing the book?

The book is meant to bridge theory and practice. The first three chapters are theory and the remaining 10 are a “how to” on constructing the financial model.  The book documents the process of building scalable, modular and portable financial models.  The goal is to document a consistent process of model development rather than each model being custom.  At this point, I now build models similar to pre-fabricated housing, i.e. take parts and build out.

The largest challenge to authoring the book was personal. The book was written during the period when my grandfather and father died suspiciously.  Actually authoring the book was a welcome ‘distraction’ to my personal saga.  The book was my lifeline to sanity and allowed me an escape from reality.

There are many books on real estate finance/modelling – why is this book different?

As mentioned earlier, it is a “how to” on pro forma construction. Also, the book focuses on the process of construction rather than construction.  The book begins by commoditizing real estate as a financial asset class.  The different product types are discussed with a focus on investment.  Investment fundamentals are accurately addressed in terms of priority: (1) Do not go to jail, (2) Return OF Capital, and (3) Return ON Capital.  Most books focus on IRR, Cash-on-Cash, DSCR, etc.  ‘Foundations of Real Estate Financial Modelling’ introduces readers to the most important metric in investing, i.e. P(Loss).  P(Loss) quantifies the probability of not returning capital.  P(Loss) must be quantified prior to moving forward on any project and the lack of quantification has had disastrous results for investors.

Financial models must be built consistently with scalability and portability. The book addresses the structure so that modelers can consistently approach all types of models.

What are some of the most common questions you get asked about real estate financial modeling in your class?

Most of the questions are simple excel questions. These are addressed in the book through the step-by-step process.  The questions that should be asked are how to value projects as part of a portfolio, i.e. marginal value, rather than absolute returns.  The books begin to explore this but this subject will be developed in the second book.

What are the characteristics of good financial modelers?

“Anal Retentive”. I once gave my father a T-shirt on Christmas that said, “Does anal retentive have a hyphen?”  I still do not know the answer to it but simply pondering the question is a good characteristic of a great modeling.  One must be detail oriented, focus on presentation and formatting, and command a great understanding of accounting and statistics.  The languages of finance are accounting and finance so understanding both to a great degree is essential.

In an interview I did with Dr. Peter Linneman I asked him “what’s the best way to break into the real estate business?” His response, get to the point where you can do Excel in your sleep. So, how can young real estate professionals get to that point?

If you want a child, it requires a pregnancy. The same is true of real estate.  The best way to break into real estate is to purchase on one’s own account.  If you and starting out, a small house that you rent rooms to your friends.  Place the house in an LLC and develop monthly financial statements, no matter how Spartan, for the business.  Track every revenue dollar and expense in a spreadsheet that flows into financial statements.  Develop a financial model for the project and the outgrowth will be a budgeting tool.

The best answer in an interview as to why you are the best candidate is because you are successful and have a successful deal completed (no matter how small). This demonstrates an entrepreneurial spirit and experience.  If you want to build wealth, trade on your own account, not someone else’s.

Financial models are simply a way to better understand the risk in a deal, but real estate is not about sitting behind a computer and building spreadsheets. What do you like most about the real estate business?

The people that you meet are the best thing about real estate. Real estate is all about people and the asset class embraces unique personalities.

What’s your favorite building and why?

My favorite buildings are the ones that I have personally worked on. From the first foreclosure to the first successful development.  A ‘parent’ can always see the beauty in a child.  Every real estate project becomes a child of sort and each is special and a favorite in their own way.