Pro Forma Real Estate Analysis Made Easy: Increase Potential & ROI

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Leah Collich

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With the constantly evolving real estate market, investors need to make intelligent investment choices. One powerful tool you can use to help unlock an investment property’s potential is a pro forma real estate analysis. By utilizing pro forma projections, investors can maximize their return on investment (ROI) while minimizing risk.

In this article, I’ll explore the power of the pro forma analysis and how investors can leverage this tool to make strategic investment decisions. Whether you are a seasoned investor or a beginner, understanding the benefits and mechanics of pro forma analysis is critical to achieving success in your investment ventures.

Table of Contents

The Importance of Pro Forma Real Estate Analysis

A pro forma statement creates a financial model that estimates a property’s potential cash flow and profitability. To understand an investment’s potential performance, it takes into consideration factors such as:

  • Rent
  • Expenses
  • Financing costs
  • Rehab costs 
  • Vacancy rates
  • Management fees

A pro forma analysis provides investors with a comprehensive financial outlook incorporating projected income and expenses. By “crunching the numbers,” they can evaluate the potential return on investment (ROI) and make well-informed decisions about their real estate investments, ensuring a higher chance of success and profitability.

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RealWealth members can access a real estate pro forma template and receive an exclusive discount on real estate pro forma software. To get the template, discount and more, join RealWealth—membership is 100% free!

4 Key Components of a Pro Forma Statement

A pro forma statement includes several key components that are essential for accurately assessing the financial performance of a real estate investment. These components provide a comprehensive overview of the property’s potential income and expenses, allowing investors to make informed conclusions. 

Let’s take a closer look at some of the key components of a pro forma real estate statement:

1. Projected Rental Income

This component estimates the potential rental income from the property. It considers market rents, vacancy rates, and projected rent increases to provide an accurate estimate of the property’s potential. 

  • Potential Rental Income

To verify current and projected rents for a property you plan to improve, you can use sites like Zillow.com to check rental prices for similar properties in the area. You can also consult with local property managers. RealWealth members can quickly research rent prices and comps with our affiliate partner who helps investors get accurate data so they can maximize their cash flow.

  • Vacancy Rates

Contact local property management companies to get estimated vacancy rates for specific markets. A benefit of being a RealWealth member is having direct access to expert property teams who will provide you with information about their markets for your real estate pro forma.

2. Operating Expenses

Operating expenses include costs such as property management fees, maintenance and repairs, property taxes, insurance, and utilities. Accurately estimating these expenses is crucial for assessing the overall profitability of the investment.

  • Property Management Fees

While property management fees vary by location and company, a good starting point is 8% of the rent. To get a more exact number, connect with local property managers. In addition to inquiring about their fees, ask what services they provide. Do they screen tenants? Do they collect rent and late payment fees? Do they handle tenant complaints?  

  • Maintenance and Repairs

A home’s age often determines how much maintenance reserves you want to set aside. You might want to use 3% of the rent for a newer home. If it’s an older home, say, built in the 80s, you might want to add 6%. No matter how well a home has been renovated, it will require more maintenance if it’s an older home. You might want to set 10% aside for a really old home.

As an investor, you’ll want to insure your property. Mortgage loans through banks will also require an adequately insured property. When you talk to your insurance agent and ask if any additional coverage is recommended, such as hurricane or flood insurance. 

You may also want to talk to your insurance company about adding umbrella insurance. This type of policy adds an extra layer of protection and can cover legal fees, judgments, or settlements beyond your landlord insurance policy.

3. Financing Costs

If the property is financed through a mortgage or other forms of financing, the associated financing costs must be considered. These include interest payments, loan origination fees, and other charges related to borrowing funds for the investment.

4. Capital Expenditures

Capital expenditures refer to significant expenses that may be required for the property, such as renovations, upgrades and repairs. Including these costs in the pro forma real estate calculations helps investors assess the potential return on investment and future expenses.

A good rule of thumb is to set aside six-month rent reserves and save 10% of your cash flow for future expenses and maintenance.

By including these components in a pro forma statement, you’ll gain a comprehensive understanding of an investment’s financial performance and better evaluate the potential ROI and risks.

Calculating Potential Return on Investment

One of the primary objectives of pro forma analysis is to calculate a real estate property’s potential return on investment. To calculate the ROI, investors need to consider the projected cash flows from the property and compare them to the initial investment. The calculation is:

ROI = (Net Profit / Total Investment) x 100

Net profit is calculated by subtracting the total expenses from the total income generated by the property. This includes rental income minus operating expenses, financing costs and other associated costs.

By calculating the ROI, investors can assess whether the potential return justifies the investment. A higher ROI indicates a more profitable investment, while a lower ROI may suggest a riskier or less attractive opportunity.

It is important to note that ROI calculations should be based on accurate and realistic projections. Investors can use a pro forma real estate analysis to estimate potential income and expenses to ensure more reliable ROI calculations and make better-informed investment decisions.

For more information, Kathy Fettke goes into more detail about this in “How to Calculate Investment Property ROI?” 

4 Tips for Mitigating Risk With a Pro Forma

As investors, we all want to mitigate risks. Here are some tips:

1. Conduct thorough market research

Understanding the local real estate market is essential for accurate pro forma analysis. By researching factors such as supply and demand, rental trends, and economic indicators, investors can make more accurate projections and assess the potential risks associated with the investment. 

If you are pressed for time to research the top-performing markets, check out Kathy Fettke’s 25 best places to buy rental property in 2024.

2. Factor in conservative estimates

When creating a pro forma statement, it is essential to factor in conservative estimates for both income and expenses. This helps account for unexpected fluctuations and provides a more realistic assessment of the investment’s potential performance.

3. Consider potential vacancies

Vacancy rates can significantly impact the cash flow of a property. By estimating realistic vacancy rates and adjusting the projected rental income accordingly, investors can mitigate the risk associated with potential vacancies.

4. Plan for unexpected expenses

Real estate investments may incur unforeseen expenses like repairs, maintenance, or legal fees. By including a contingency fund in the pro forma real estate analysis, investors can have a buffer to cover these unexpected costs and minimize the impact on their investment.

A person at a desk with a laptop checking their pro forma real estate analysis.

5 Ways to Create an Accurate Pro Forma Statement

As you analyze more investment properties, you may notice that some sellers are consistently off in one or two line items. They may overstate rents or understate property insurance. As you continue to do more, you’ll know where to check and re-check. To help get you started, here are five ways to create a reliable pro forma analysis.

1. Gather accurate data

Accurate data is the foundation of a reliable pro forma statement. Collect detailed information about the property, including current rents, property taxes, expenses, and any planned changes or improvements. 

If a seller provides numbers, it is essential to check them. If you aren’t sure how to verify the numbers they’ve provided, RealWealth Investment Counselor Joe Torre walks through a pro forma statement line by line in this video, showing you how to analyze rental properties to ensure the numbers the seller gives you are accurate.

2. Utilize market research

Conduct thorough market research to understand the local real estate market. Analyze rental trends, vacancy rates, and economic indicators to make more accurate projections and estimates.

At RealWealth, we monitor real estate trends and analyze current and new markets for investment potential for our members. For more insights, watch RealWealth Investment Counselor Joe Torre’s video on how to choose a real estate market or become a RealWealth member and get access to hundreds of educational real estate investing resources.

3. Consult with experts

If you need clarification on certain aspects of the pro forma analysis, consider consulting with real estate professionals or experts who can provide valuable insights and guidance. At RealWealth members have a dedicated Investment Counselor who is also a savvy real estate investor. 

4. Use reliable software or tools

Various software and tools are available to help streamline the pro forma real estate process. Using reliable and reputable tools can help ensure the accuracy and efficiency of your calculations.

As mentioned above, RealWealth members have access to a simple real estate pro forma template and an exclusive discount for real estate pro forma software. To get this tool, discount and more, join RealWealth.

5. Update and review regularly

Real estate markets constantly evolve, and factors such as rents, expenses, and market conditions can change over time. Regularly update and review your pro forma statements.

Getting comfortable with the pro forma statement process positions you to make informed and strategic investment decisions. It also enables you to act quickly when a good deal comes along.

Work With the RealWealth Experts

At RealWealth, we help busy professionals invest in single-family homes, duplexes and fourplexes. How does it work? We save you time by doing a lot of the heavy lifting by:

  • Identifying the best real estate markets
  • Screening home builders
  • Vetting turnkey providers
  • Finding the best property managers

Once we identify a good team to put together, we invite them into RealWealth. In turn, they offer single family, multi-family and new build properties to our members. Along with our trusted property teams, we also have a network of recommended lenders, lawyers, 1031 exchange facilitators, and many more. Our goal is to always connect our members with the best of the best for teams, providers, and resources.

Members can access all of our educational resources, webinars, and tools, including a downloadable master pro forma real estate template and software partnerships. Plus, every member has a trusted Investment Counselor, like me, to answer questions and help build a strategy that meets their needs.

For investors who may lack time to research the best markets and find cash-flowing or high-appreciation properties, becoming a RealWealth member is a fantastic way to accelerate your real estate investing strategy and receive valuable insights and guidance from trusted real estate professionals.

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