What is a Proforma?
A proforma is a powerful tool used to estimate a property’s revenue and operating expenses over a 5-10 year period. They can include key details such as rent rates and vacancy rates. This allows investors to evaluate the potential risks and benefits of investing in a property.
Proforma Line items
Effective Gross Income: The effective gross income is an investment property line item that includes all income sources minus allowances for vacancies and debt.
Potential Gross Income: Potential gross income calculates the maximum revenue of a property that is fully utilized with zero vacancies.
Other Income: Rent is not the only source of income a property can produce. Other income sources can include paid parking, vending machines, late fees etc.
Vacancy Allowance: Ideally, a property would be operating at full capacity without vacancies. However, this is not always the case. To account for vacancies, proforma’s usually include a 5-7% decrease of the potential gross income.
Bad Debt: The bad debt expense refers to costs incurred when tenants are unable to pay rent. This expense includes legal fees and the amount due.
Operating Expenses: These expenses includes maintenance fees, operation costs, repairs, property management fees, etc. In order to continue the daily functions of a property, investors must allocate money to cover the expenses.
Summary
A proforma is used to project a property’s income and future value. The proforma calculates a property’s income and future value by subtracting operating expenses from total income to determine the Net Operating Income (NOI). Investors use the NOI to gauge a property’s profitability and guide financial decisions. While the other line items accounts for variables that may impact the revenue. Creating an accurate proforma is vital since inaccurate financial calculations can risk potential opportunities or can lead to financial pitfalls.
All in all, crafting an accurate proforma is integral to the success of real estate investment and working with a team of experienced individuals can assist in ensuring a sound financial investment.
