What On Earth Is a Proforma Income Statement And Does It Really Help Make Good Real Estate Investment Decisions?

A good solid proforma income statement (or proforma) can be described as a real estate investments statement that property investors and specialists normally make use of for the purpose of projecting the cash flows an income real estate asset might produce for a prospective owner over the course of future years of ownership. The idea is straightforward.

By projecting out over a certain number of years the income that the rental property could very well create, real estate investors and analysts have the ability to carry out a profitability analysis which is going to help them to estimate the potential future over-all performance of a property. Thus lending support to their investment decision-making process.

There are virtually no restrictions on the amount of years a person would like projected in the proforma income statement. I've encountered proformas (for instance) that produce statements which range from ten to twenty years; several software companies in fact boast that their package can provide thirty-year forecasts. Even so, I honestly believe that these kind of longer span forecasts can end up being too misleading to indeed be issued very much weight. You will discover just too many issues which can affect any cash flow estimate (even more so for that many years). So if you happen to be using a real estate investment analysis software program that generates a ten-year proforma income statement to do your real estate analysis you can regard that ample.

By the same token, there are no limitations on the proforma regarding the assortment of fiscal information it displays. A first-rate statement will need to (at the very least) project annual (end of the year) results for cash flows, rates of return, and the earnings that are due to a sale (known as reversion). However the even better ones additionally contain the elements of tax shelter; thereby enabling real estate investors to also consider the property's returns "after taxes". This is important. The income tax liability an investor encounters during ownership of the property greatly impacts whether or not the property is a profitable investment opportunity. Therefore it is smart to use a proforma that includes full consideration for income taxes.

Fair enough. But having said all of that, there are two important issues you must consider.

1) That regardless what features and data you prefer, the proforma must accommodate your business objectives and show you the data you require to make a real estate investment decision.

2) That the particular forecasts you want to generate are relying on solid information. No proforma income statement is worth the paper it's printed on unless the data is accurate. When making your projections, for instance, if you believe that rental income can reasonably appreciate two percent each year than fight off the temptation to bloat that number to three or four percent merely because you pray so. You might even give thought to staggering the percentage of growth simply to be safe. Maybe two percent appreciation for the second year, zero percent for years three and four, and one percent each year thereafter.

How do you go about obtaining a proforma income statement? Naturally, you can create your own with an Excel spreadsheet and some surplus time. In fact, a whole lot of surplus time. Or, as an alternative, you can consider just investing in a good real estate software application that will create the statement for you. Regardless, whether you make it yourself or invest in software, you most definitely do not want to be without a proforma the next time you get around to purchasing investment real estate.

Comments? Questions? Email Here

© HowtoAdvice.com