What is a Pro Forma?

According to the Real Wealth Network, the definition of a pro forma is a method of calculating financial results in order to emphasize either current or projected figures. A property's pro forma in real estate are its cash flow projections. So to make things simple, when you are looking to invest in real estate, a pro forma is essentially an income and expense sheet.

Before purchasing any real estate I think it’s necessary to create an income and expense sheet to get an idea if the investment is worth your time and energy. So if this is your first property, you may be wondering what figures to include. Below is a breakdown of what I do for every property. I then keep a running record of each property so we have an estimated cash flow per month. It helps a lot when you are planning for renovations to get an idea of your budget.

What I include on the income and expense sheet is everything that comes in and out of the account each month. So for this particular property (pictured below), the mortgage, insurance, lawn care (only in summer months), and lots of taxes. The two other expenses at the bottom, appliances and window world, are only temporary as they were expenses during the renovation that the property is currently paying off. We don’t include any utilities with the apartments as they are the tenant’s expense.

So looking at this, once the windows and appliances are paid off the property will be profiting roughly $1027 a month. What an acceptable return on a property investment is really up to your discretion. I know there are a lot of numbers out there on what your return should be, but I think it’s up to you as the investor.  If you can purchase a property that needs minimal work and has a return of $300 a month that might be great for you. You won’t have to spend money to fix it up and its already making you money. Personally, we tend to purchase properties that need a lot of work because we can get them for a low price and build equity. So for us if we purchased a place that was a complete reno and it was only going to profit $300 a month, that wouldn’t be worth it for us. Of course there are equations you can do for ROI (return on investment) or cap rate to see a properties profitability, but these numbers don’t show the whole picture such as neighborhood or home condition and shouldn’t be relied on solely when trying to make a decision to purchase. They are basically a quick snapshot of the financials of the property.

So next time you are thinking of purchasing a rental, or even your own home take some time and do an income and expense sheet. It will help tremendously and help paint a clear picture of what is and isn’t feasible. Please shoot me an email if you have any questions, I’d be happy to help!