In this blog post, we explain how AzureAI can be used to forecast real estate cash flow and search distressed and discounted real estate investment opportunities from huge amounts of classified sales ads online. The aim is to inspire you to try advanced searches with AI.

Mikko Valtonen is an Aalto University graduate, a Data Engineer who helps customers at Vuono Group to set improvement targets, execute change, and measure success using the best AI tools on the market. At Vuono Group, we optimise processes through data and software to drive business value.

Tools for picking “the needle from the haystack”

Searching for the best investment is tedious; you need to analyse the value of hundreds or even thousands of properties. Throughout history, evaluating qualitative documents has been manual, slow, and expensive. In February 2023, the advent of ChatGPT helped alleviate the high cost of manual text processing. A startup called OpenAI demonstrated that AI can be applied to complex transformations. As of June 2024, the most advanced AI tools are listed below. Source: https://chat.lmsys.org/?leaderboard

These AI tools are impressive but still cannot perform most business tasks. The biggest reason why AI does not get the job done is the inherent random hallucination feature. Most tasks are sensitive to quality and reliability, and therefore, current AI agents are not suitable for them. The picture below illustrates the dramatic difference between business critical task and search task risk profiles.

While GPT-4 cannot handle most business tasks, it can improve search quality and reduce costs in finding the best investment opportunities.

Recommended tech stack of quantifying qualitative data

In the Finnish geographical region, the internet contains more than 50,000 real estate investment opportunities as classified ads. More than 30,000 of these are apartments. In an apartment, the housing company (asunto-osakeyhtiö in Finnish) manages and owns the property. For apartments, future cash flows are easier to forecast than non-housing company entity properties.

To identify the best investments, you need to accurately forecast future cash flows for each property and select the one that offers the most balanced short-term and long-term cash flows relative to its price. For this blog article, the following technical setup was constructed:

As this service is an internet search, which includes calculations and text transformations, in step 0 we ask permission from the user to conduct a search on their behalf from publicly available sources. No unnecessary data is processed, only minimal public data.

In step 1, a web crawler called Apify collects ads only from public internet sources into the Apify value store. In this step, the ads are also loaded from the Apify value store into a Power BI table.

In step 2, we query rent data and trends from Tilastokeskus's open data source.

In step 3, past and upcoming renovation details for each property are sent to the Azure OpenAI API.

In step 4, the AI identifies and classifies future renovation costs based on renovation plans, completed renovations, and building age.

In step 5, cost estimates are sent to Power BI and stored in a Power BI table.

In the final step, step 6, the net present value (NPV) is calculated, compared to the price, and top discounts are filtered. The results of step 6 can be seen in the report screen print below.

Short-term cash flow forecasting

Predicting short-term cash flow is crucial when selecting investment opportunities. In our analysis, we created two key performance indicators (KPIs) for short-term financial performance: 'Start Cash Flow €/month' and 'Start ROI %'. These columns represent the first two KPIs calculated based on rent revenue, costs, and annuity.

Statistical distribution of short-term benefits from over 30,000 investment opportunities listed publicly on the Finnish market in May 2024 online is presented below:

Cash flow is calculated using 70 % loan leverage and 5 % interest. We can see that only a small fraction lead to positive cash flow. We can see that in most cases, the ROI is negative indicating huge amounts of “horrible” investment opportunities.

Long-term cash flow forecasting

Long-term cash flow is also crucial when searching for the best investment: you want to invest in a property where future cash flow improves. While predicting property prices is difficult, forecasting cash flow is achievable, and rent isn't speculative. In the report created for this blog, the cash flow trend is shown in the 'Rent Trend % per Year' and 'Renovation Debt' columns.

AI predicted the renovation debt using information on completed and planned future renovations. This is presented in the 'Upcoming Renovations €/m²' column.

Upcoming renovations were classified with the following simple “few shot learning” prompt:

Following text contains list of completed (done) renovations and planned future (upcoming) renovations of a department flat. Please evaluate the list and make conclusions if the Pipes are in original state or renovated.
Output only one of the three options: "1. Pipes are renovated" or "2. Pipes are in original condition" or "3. Pipe condition is unclear or they are partially renovated". Texts are in Finnish language. Do not return any explanations, only the conclusion from list of three options. For example, if the upcoming renovations contains text "Liniasaneeraus alkanee alustavan arvion mukaan loppuvuonna" then correct answer is "2. Pipes are in original condition"

Classification results were converted into monetary value with the following DAX formula.

Statistical distribution of long-term benefits from over 30,000 investment opportunities listed publicly on the Finnish market in May 2024 online is presented below:

Balancing long-term and short-term benefits

To find the best investment opportunities, you need to balance short-term and long-term alternatives. Typically, big cities exhibit poor short-term cash flow, but as rents grow there more, they tend to offer better long-term cash flow. This balancing act is managed using Net Present Value (NPV) calculations and 'Margin of Safety' analyses.

According to Wikipedia, Net Present Value is calculated using the following formula.

According to Investopedia, Endless NPV cash flow can be applied to real estate dividends using the Gordon Growth Model as follows:

According to Investopedia, the margin of safety is an investment principle where an investor only purchases securities when their market price is significantly below their Net Present Value. In other words, when the market price of a security is much lower than your estimated Net Present Value, the difference is the margin of safety.

Because investors can set a margin of safety according to their risk preferences, purchasing securities with this margin helps minimise downside risk. Below is a screenshot of the Gordon Growth Model applied to real estate in Power BI, and a simple Margin of Safety calculation.

Price, Net Present Value, and Margin of Safety are reported for each of the 30,000 investment opportunities to identify and prioritise the best “Margin of Safety” opportunities.

Statistical distribution of NVP and margin of safety from over 30,000 investment opportunities listed publicly on the Finnish market in May 2024 online is presented below:

The conclusion from the cash flow prediction and search experiment

This internal AI search development experiment and proof of concept shows that AI can convert completed and upcoming renovation listings into cost estimates at a fraction of the cost compared to humans, making complex searches 10,000 times cheaper.

We hope this blog post inspires you to find new ways to quantify qualitative data and provides interesting insights for comparing investment opportunities.

Find the best real estate investment opportunities with AzureAI