| When a real estate investor or analyst wants to | | | | shows cash flow after taxes, sale proceeds, cap |
| determine whether a rental property is profitable | | | | rate, return on equity and so on, you will need to |
| and might offer a good investment opportunity or | | | | include tax information such as depreciation, |
| should be dismissed, they commonly evaluate the | | | | mortgage interest, amortized loan points and the |
| property's projected future revenues. | | | | investor's marginal tax rate, a projected selling |
| The idea is to estimate the cash flows and rates | | | | price for each of the years, and a round of |
| of return a rental property may produce for | | | | additional computations for the rates of return. |
| future years by projecting its income, operating | | | | Start with year one and then add each of the |
| expenses, and loan payment out for maybe ten | | | | figures to the following years. You can inflate a |
| years based upon some assumptions. | | | | sales price in exactly the same manner you did |
| The concept is straightforward. Increase the | | | | for income and expenses or select another way |
| income and operating expenses annually by some | | | | to project a sales price such as with a cap rate, |
| estimated percentage rate to arrive at a net | | | | gross rent multiplier, or set dollar amount. The |
| operating income (income less expenses), then | | | | depreciation rate depends on whether the rental |
| deduct the mortgage balance owed for that | | | | property is residential (a home rental or |
| particular year to compute the property's cash | | | | apartments), or non-residential (commercial use). |
| flow and subsequent rates of return. The | | | | The loan will also have to be amortized so you |
| proforma income statement (or proforma) is | | | | can determine the amount of interest paid during |
| generally the report used to project these | | | | each year. |
| revenues, and in this article, we'll discuss some | | | | You can find information regarding the |
| simple basics to give you the idea. Please feel free | | | | depreciation schedules online if you're planning to |
| to visit my website if you would like to see a | | | | construct your own proforma, otherwise a good |
| sample proforma. | | | | real estate investment software solution will have |
| How to Create a Proforma You can choose one | | | | it built in to the program and you will just have to |
| of two methods. You can use a spreadsheet or | | | | fill in the forms. |
| you can invest in a real estate investment | | | | Whether you choose to use real estate |
| software solution that provides the forms and will | | | | investment software or a spreadsheet, here's |
| create a proforma income statement for you. | | | | what you want to keep in mind about your |
| In any case, the important thing is to start the | | | | statement. |
| proforma with numbers that accurately reflect | | | | 1) You are essentially looking to analyze the cash |
| the property's current financial position, i.e., | | | | flow and other performance measures resulting |
| income, operating expenses, and loan payment. | | | | from changes to such variables as income, |
| This will represent year one. | | | | operating expenses, and property value over |
| Next, make an estimate as to how much you | | | | some number of future years. |
| think income and expenses will increase annually | | | | 2) Because it consists of projected estimates, |
| (use separate percentage rates for each if you | | | | don't rely solely upon a proforma income |
| wish) and multiply your starting numbers by these | | | | statement to make your investment decision. |
| rates to calculate for year two, year two's | | | | 3) Also, because it is speculative, you might not |
| numbers again for year three, and so on out as | | | | want to construct your proforma out further |
| many years as you deem necessary (ten years | | | | then ten years. |
| is typical). Be sure to include the loan repayment | | | | 4) Always use income and operating expenses |
| for each of those years. | | | | that are realistic to begin with and then use a |
| Finally, for each year, subtract the operating | | | | reasonable percentage rate to inflate them |
| expenses from the income to determine the | | | | annually. The same would be true with the |
| rental property's net operating income then | | | | projected selling price of the property. |
| subtract the loan payment to arrive at the cash | | | | To get a better idea about creating revenue |
| flow (or more specifically, cash flow before | | | | projections for rental properties, you can see a |
| taxes). | | | | completed sample proforma on my website. |
| For a more elaborate income statement that | | | | Here's to your real estate investing success. |