In short, a Real Estate Pro Forma is a cash flow projection. In this post, we will have a look at one real estate proforma example, and explain how you should read it. Keep in mind that there are many components common to all real estate proformas, regardless they were made out of a real estate pro forma template excel or a real estate pro forma software. We will keep it basic.
If you want to know more about Real Estate Investing in general, I recommend you to read my own book, where I run actual Real Estate cash flow analysis. While I don’t explain real estate proformas in my book, I do use some of the terms that are used in this real estate proforma 101 post. So, let us get to it.
Real Estate Pro forma Example
Potential Gross Income (PGI)
Usually, real estate pro forma start with the cash that is collected if the property is leased all the time. This is called the Potential Gross Income (PGI), although sometimes it is referred to as Scheduled rent. This is usually a combination of both contractual leasing terms and market values for rents.
Of course that if you have a contract covering the entire period, market rents are not taken into account. However, if there is a “whole” in the leasing contract – say that you rent your home to students and they do not rent the home during the summer, as they have no classes. In that period, market rent is forecasted to determine the cash flow of that period. Always make sure that commissions are taken into account here.
Vacancy Allowance
Typically, properties are not leased 100% of the time, so you’ll see this line on the real estate proforma.
Vacancy can be calculated in different ways, but because it is hard to predict vacancy rates accurately, it is usually considered a small, fixed percentage. If the number showing up on this line does not translate into a fixed percentage of the Scheduled rent, it is probably calculated in a different way (for example taking market conditions into account).
Other Income
Other income typically follows vacancy allowance. This may include, among others, parking or antenna income (which I am currently trying to get on my Rental Property #3).
Operating Expenses
Operating expenses are the expenses associated with your investment property, which includes (although not limited to) property taxes, insurance, and property management staff. All too often, tenants have the so-called net leases, which means that they pay for most of or even all the operating expenses. I currently pay for all my operating expenses, because that is the standard rule in Portugal. Always make sure that the terms of the leasing contracts match the Real Estate Pro forma.
Net Operating Income (NOI)
The Net Operating Income is arrived at by subtracting all operating expenses from the gross income of a given property. If you check my real estate portfolio, you’ll find the NOI in the spreadsheet at the top. This post is only meant to explain what a real estate pro forma is. For my opinion on ideal NOIs, check my book. Either way, the term NOI is probably the number one term when predicting and calculating cash-flow for rental properties. However, the NOI takes into account many expenses that vary from state to state and individual to individual. Each individual may incur different property management fees. Therefore, Before Tax Cash Flow may be more of a fair term for comparison purposes.
Before Tax Cash Flow (BTCF)
Usually the net operating income minus any additional expenses (sometimes referred to as other expenditures) that may be known upfront result in Before Tax Cash Flow for the property. Of course that after-tax cannot be calculated in a Real Estate Proforma because each individual may be taxed very differently. However, it provides a picture of what should be expected regarding free cash flow, before taxes.
If you want to download a real estate pro forma template in excel, have a look at this one. If this real estate pro forma template does not meet your requirements, Google up a few terms. Try out “pro forma rent”, “pro forma cap rate” and “real estate pro forma”. I usually see many real estate pro forma examples for real estate development software too, if you want those. Finally, if you want more information on Real Estate pro forma, I reffer you to the Urban Land Institute.
Best,
Ben Davis