Real Estate Proforma: A Comprehensive Guide

A real estate proforma is a financial model used to analyze the potential profitability of real estate investment. It takes into account various factors such as acquisition costs, rental income, etc.

April 20, 2023

real estate proforma

Real Estate Proforma

A real estate is proforma is a tool used by investors to assess the financial feasibility of a potential investment property. The proforma calculates the potential current, medium, and long-term annualized Net Operating Income (NOI) for a property, which is the net cash flow generated by the property after accounting for all income and expenses except for mortgage principle paydown and non-income and non-revenue activity.

Lenders will often require a real estate proforma when considering a loan for a new development project. The proforma is also useful for investors to compare different properties and make informed investment decisions.

This article will provide a comprehensive guide to real estate proformas, including how to create a pro forma for real estate.

What is a Proforma in Real Estate?

The Latin phrase “pro forma” means “for the sake of form.” A proforma is a financial statement that projects future income and expenses. It is not a historical statement but rather an estimation of future earnings based on current trends and assumptions.

The NOI of a property is determined by subtracting the property’s operating expenses from its gross income. Operating expenses include items such as property taxes, insurance, and repairs and maintenance. It is a critical metric in real estate investment, as it provides a clear picture of the property’s expected cash flow and return on investment (ROI).

What are the Different Types of Proforma?

There are two main types of proforma in real estate:

1. Historical proforma: Historical proforma is based on the actual financial history of a property. This type of proforma can help project the future financial performance of a property.

2. Projected proforma: A projected proforma estimates future income and expenses based on current trends and assumptions. It is used to assess the financial feasibility of a potential real estate investment. To create a projected proforma, you will need to make several assumptions about the future income and expense of the property. These assumptions should be based on market trends and your own experience in the real estate industry. Once you have made your assumptions, you can input them into a proforma template. A proforma template typically includes fields for the property’s address, purchase price, and projected income and expenses.

Benefits of a Real Estate Proforma

There are many advantages to using a real estate proforma, including the following:

1. It helps you assess the financial feasibility of a potential investment.
2. It assists you in comparing different investment opportunities.
3. It gives you a clear picture of the property’s expected cash flow.
4. It helps you make informed investment decisions.

While a real estate proforma can be a helpful tool, there are also some limitations. For instance, a real estate proforma is based on many assumptions and estimates. As you already know, the future is impossible to predict with total accuracy. In addition, a proforma does not account for all types of risks.

How to Create a Proforma for Real Estate?

You can find a proforma template online or in a real estate investment software program. When creating your proforma, include all relevant information about the property, such as the address, purchase price, and projected income and expenses.

You should also make sure that your real estate proforma reflects your assumptions about the future of the property market and the specific investment opportunity.

The elements that contain revenue and expense information must be included in a real estate proforma. It must also be well-structured. Ideally, it should cover all potential costs related to investment properties, ranging from the base rental revenue to property management costs and taxes.

When you create a pro forma for real estate, there are several things to look out for. In reality, salespeople, agents, and brokers may be overly promotional within the proforma projection found in their marketing prospectus. Here are two red flags that all novice real estate investors should recognize:

An incomplete Proforma: Although this may seem quite elementary, some real estate brokers voluntarily leave out many important details. This sort of Pro Forma cannot be relied on and an educated investor needs to gather the necessary information to create an accurate real estate proforma.

An extremely complicated pro forma: A real estate proforma shouldn’t be unduly complicated; they should be straightforward and simple to understand. However, many sellers and agencies work hard to make their real estate proforma as complicated as possible. This strategy aims to perplex the investor and muddle the distinction between revenue and expenses.

Tips for Calculating Proforma

Things to consider in your real estate proforma are:

1. Gross Potential Income
2. Vacancy rate
3. Concession rate
4. Anticipated Bad Debt
5. Payroll expense
6. Repair expense
7. Taxes
8. Insurance premiums
9. Legal fees
10. Capital cost
11. Property management fees
12. Mortgage interest

The formula is:
Real Estate Proforma NOI = Gross Potential Income – Vacancy, Bad Debt, Concessions, and All other operating expenses

Real Estate Proforma: Conclusion

Hopefully, after reading this blog, you know a little more about how to build a real estate proforma. If you are looking for a property management company that can help with your real estate investment, consider Summerfield Property Management!

We at Summerfield employ years of experience to ensure that your buildings compete well in the market. You can learn more about our services by scheduling a meeting with us today!

Real Estate Proforma: FAQs

Q: What is the purpose of a real estate proforma?

A: The process of making financial projections for a given future time period in a standardized manner is known as “presenting pro forma,” a Latin phrase that means “as a matter of form.” Pro forma statements are used by investors to make business decisions.

Q: What is included in a real estate proforma?

A: It includes forecasts for income, vacancies, and expenses to estimate the anticipated return on investment (ROI) for a real estate investment.

Q: What are the three main financial statements found in a real estate proforma?

A: The three main statements are a projected rent schedule, a profit and loss statement, and a cash flow statement.