6 Items To Examine on a Pro Forma Report

When considering a commercial real estate investment, you will receive many forms and figures for your consideration. Evaluating the ideal parcel for your property investment portfolio allows you to select the one that matches your financial goals. It is important to understand the proforma report. A commercial rental property proforma report shows the current financial analysis of the property. Here are a few vital figures to look at when reviewing a proforma.

Gross Revenue

Gross revenue is the revenue the property would earn at the current rental rate if the units were at 100% occupancy. While it is important to recognize the potential the property could earn, consider the vacancy rate when evaluating revenue. Most real estate management analysts assume vacancy rates of 5%, meaning 95% of units are occupied at any given time.

Operating Expenses

It is important to understand the operating expenses related to property maintenance. Remember to add these expenses into your budget. However, many of these fees can be passed along to tenants. Review existing rental contracts to determine what portion of these expenses your tenants pay. Typical operating expenses include:

  • Property taxes
  • Building maintenance costs
  • Parking lot and common area maintenance fees
  • Repair costs
  • Property management fees
  • Utility expenses

Debt Payment

The amount you pay toward your property investment, less operating expenses, makes up the debt payment. Divide the property’s net income by the debt payment to calculate your Debt Service Coverage Ratio.

Net Operating Income

Calculate NOI by subtracting the property’s revenue from vacancy and operating expenses. Keep in mind that this figure does not include tax payments. This important number allows you to compare two similar properties to determine which has the most profit potential.

Return on Investment

ROI is calculated by subtracting the cost of investment from the gain. That number is then divided by the cost of your property investment. The final percentage helps you gauge the profit potential of the property.

Cash-on-Cash Return

Cash-on-cash data provides you with the previous year’s income compared to the mortgage paid. Keep in mind this number is pre-tax dollars, based on a specific period, and calculated annually, so be sure to ask for the most recent data if it is not provided.

Having a firm understanding of these figures helps you make an informed decision when selecting your next real estate investment. Making educated decisions about your financial portfolio helps ensure the most profitable venture.