investing is a type of investing that many new investors may not even be aware of. Pro Forma investing is an important tool that investors use to assess the potential profitability of an investment property. Knowing the profitability of a potential real estate investment is essential to any successful long-term real estate investor’s portfolio.
What is Pro Forma Investing?
Pro Forma investment is a forecast of what a return can be expected from a real estate investment, based on certain assumptions. Pro Forma gives investors a more realistic outlook as to the total costs associated with acquiring, maintaining, and selling a property, as well as its potential ability to deliver an adequate return on investment. It is important to remember when creating a Pro Forma that it is an estimate, not a definitive answer, so there may be some variability between actual and assumed returns.
Why is Pro Forma Important in Real Estate?
Pro Forma helps investors gain an understanding of the long-term potential of a property by allowing them to understand the projected cash flows and expenses associate with an investment. In addition, investors can use Pro Forma to compare different potential investments and properties to determine which ones would be most profitable.
What Do Pro Forma Statements Include?
Pro Forma statements typically include a variety of information proposed for a given project:
- Project description: This includes the size of the property, type of real estate, estimated costs of acquisition and completion, estimated appreciation and estimated sales price.
- Potential cash flows: This measures the projected cash flows that the property may bring in from a tenant’s monthly rent, plus any other sources like service fees or parking fees.
- Potential expenses: This may include projected mortgaging costs, taxes, insurance, maintenance, and other miscellaneous expenses.
- Return on investment: This is based on the potential cash flows, potential expenses, and projected appreciation.
Pro Forma investing is essential in helping to forecast potential returns, giving investors the right information to make informed decisions and build a successful portfolio of real estate investments.