Pro formas - broken down, dissected and analyzed
As we wrap up our three part series on Pro formas and everything you need to know, we conclude with the nitty-gritty where Pro formas are broken down, dissected and analyzed to help our real estate investor friends.
Pro Forma Section 1: Price and Financing
What most Pro formas spell out
Price
Interest rates
What your diligence should spell out
Price
Down payment
Loan origination fees
Closing costs
Total Cash invested
Pro Forma Section 2: Operating Income
What most Pro formas spell out
Income
What your diligence should spell out
Income
Vacancy loss
Total operating expense
Pro Forma Section 3: Operating Expenses
What most Pro-formas spell out
Taxes
Insurance
What your diligence should spell out
Taxes
Insurance
Management fees (if applicable)
Leasing fees (if applicable)
Association fees (if applicable)
Maintenance
Landscaping: Mowing, snow removal (if applicable)
Pro Forma Section 4: Net Operating Income
What most Pro formas spell out
Cash Flow
What your diligence should spell out
Cash flow
Tax savings
Principle reduction
First year appreciation
Pro Forma Section 5: Financial Indicators
What most Pro formas spell out
Cash flow
Appreciation
What your diligence should spell out
Cap rates
Cash on cash returns
Total return on investment
Total ROI without tax savings
The biggest clarity I hope you were able to get out of this 3 part post is that there are many variable to a Pro forma, they are a snapshot look into a property and should be compared to other snapshot reports to do quick side by side analysis when weeding through properties and those that represent the best deals. You should never purchase a property on just the Pro forma alone.
As I get so many questions around these topics I have created a calculator to help make this easier. When you narrow a property down to a couple of the best prospects, plug the information into the IDEAL Real Estate Investor calculator, which will spell out the more in depth details.
Most sales people caution going into this depth of analysis, as many people who would have once made a purchase of a property will no longer be interested when the true numbers come out. While it is true that many investor have too high expectations, it is my belief that their expectations are too high because they have to build in such a large safety factor. If you have the tools necessary to make sound buying decision (like those we offer here), you can feel good about going forth and investing with purpos