Knowing the difference between a Performance Report and Pro forma can be the difference between making money and losing your shirt! It is interesting to watch why some investors make such great returns on their cash flow and growth, while others struggle to make any at all! We know from years of experience that it all starts with your diligence on the property.
You all know my stance on the best location being paramount, for this post I want to give you clarity in the diligence of Pro forma’s, what is the difference between a Pro forma and a performance report?
Many investors, especially our friends from oversees are perplexed by the America Pro forma. And rightfully so, it is confusing.
Performance Reports Versus Pro formas
Many commercial higher end investments will give a true Performance report. These are typically million dollar plus investments with lots of income coming in and going out each month and as a result they have a great set of financials on the property. With all the financials on the property reported, they can give a true picture of the financial stability of the property and therefor they will provide a performance report. This report provides a true picture of what is going on in the business side of the property.
Many smaller properties such as single family homes or 1 to 4 unit properties that are purchased for investments usually lack this detailed history of the financials. Some may have no financial background at all, as it has never been used for income producing efforts in the past. When this is the case, you will be looking at a Pro forma. A Pro forma is more of a speculative set of numbers giving you an idea of what should be your rate of return. Remember, as it is not a true performance report, you will want to look over this with an eagle eye.
There are many many variables that can be introduced on a Pro forma to make it look like a viable investment, when indeed, it may be anything but a good investment. Every investor should look at a Pro forma and calculate it to accommodate their personal circumstances.
Let’s break this down in the next post on Real Estate Investing Pro forma’s.