Pro Forma
A financial projection document showing expected income, expenses, and returns for an investment property.
Definition
A pro forma is a financial model projecting expected income, expenses, and returns for a real estate investment. It's the investor's roadmap — showing how the deal should perform year by year under a set of assumptions.
A well-built pro forma includes: gross rental income (by unit/space), vacancy allowance, all operating expense categories (taxes, insurance, management, maintenance, capex, utilities), debt service, and bottom-line cash flow. It should also project NOI, cash-on-cash return, and IRR across the entire hold period.
Pro formas are projections — their accuracy depends entirely on the quality of the underlying assumptions. 'Garbage in, garbage out.' Common mistakes: using optimistic rents, underestimating vacancy or capex, and ignoring management fees. When reviewing a broker's offering memorandum pro forma, stress-test every assumption independently.
Related Terms
Net Operating Income (NOI)
A property's total income minus all operating expenses, before mortgage payments and taxes.
Cash Flow
The money left over each month after all property-related income and expenses are accounted for.
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested, expressed as a percentage.
Internal Rate of Return (IRR)
The annualized rate of return on an investment accounting for the timing and magnitude of all cash flows.
Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
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Also in "P"
PITI
Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment.
Points (Origination Points)
Upfront fees paid to a lender, equal to 1% of the loan amount per point.
Private Money
Loans from individual private investors — usually friends, family, or high-net-worth individuals — secured by real property.