When listing multi-family real estate investment opportunities, brokers will often provide the Offering Memorandum (OM) which includes details about the market, property, selling points and financials. As part of those financials, the broker will include financials from the current and/or previous year as well as the pro-forma.
What is a Pro-Forma?
The pro-forma is simply what the broker believes the possible future financials could be based on certain assumptions. it is nothing more than a projection. This is potentially valuable information to buyers because it highlights where the upside opportunities are after acquisition. For example, the asset may produce a current net operating income of $100k per year, but with certain capital improvements, renegotiation of contracts, improved collections, higher occupancy and rent growth, the broker projects that the potential net operating income is $150,000 per year. This $50,000 increase to NOI directly impacts the property’s value and the equity created for the investors. Understanding the property’s income earning potential is crucial to successful multi-family investing.
Buyer Beware
Of course, as potential buyers of the asset, it is critical that you do your own due diligence and verify projections by working with your property manager to understand the market rents for similar properties and units in the area. However, the pro-forma information is a great starting point for investors to understand the broker’s assessment of the property’s income earning potential.
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