Pro-formas are an essential for people who are serious about real estate development. They offer a snapshot idea of the future, based on the data that is available, and your knowledge of the current market, and future trends. If you are evaluating a new development opportunity, then you will need to be able to make a sound case for that development to any potential partners and lenders. The pro-forma is a massive part of making that argument. Modeling a pro-forma takes some skill and experience. The basic mechanics are simple – money is invested into a project and is used to create or improve the project, then that money comes out in return on the investment. You can find a site the implements pro-forma modeling for flipping houses if you click here.
Why Build From Scratch?
There are pre-made proformas out there, and they can be useful for giving you an idea of what is the best practice. However, if you are building a model for a significant build, then it is a good idea to do so from scratch. Pick a project that you are considering developing, and start breaking that project down. Start with your assumptions – these are things that you already know. Lay out the size of the site, any constraints, land acquisition costs, zoning issues, tax payments, etc. Next, lay out the development and construction schedule. This schedule will, of course, be a set of estimates at the moment. These assessments will get more detailed and more useful as the project goes on.
Have a Clear Target
Stop to think about the scope of the building project. Are you looking for a small rental property, an apartment community, a single home, or a retail strip? The range may change as the project goes on but having an idea of what it is now will be helpful – especially if you need to get planning permission or need to take into account existing land uses.
As the project evolves, you will find yourself coming back to the proforma and changing it. The more you know, the more readily you will be able to work on the project and the easier it will get to plan expenses and calculate returns.
There are pro-forma templates that can be used to help you set up your analysis, but they are most useful when you are looking for guidance on what inputs and projections are essential. A good pro-forma will give you the framework that you need for your calculations, but you should never rely on someone else’s figures – make sure that you fully understand the project before you start putting money into it.
Remember that every project is different and that depending on the scale of the project and the area you will have to work on various issues. As a part of your initial feasibility study, you will need to think about the advance cash you have, the amount you will be borrowing, the financing terms offered by the lender, and then the expected return. Remember that if your project goes over schedule or you need more repair work done on a property than you expected, then this can have a significant impact on the project. The various models that are available will help you to predict your return on investment, but you need to build in the possibility that you will end up facing unforeseen expenses.
There is always some possibility of capital appreciation, however, if your model is based entirely on the idea that you will see capital appreciation, then look at rental property rather than flipping. The rental property will give you a steady stream of income from tenants, and rent can change based on the current value of property in that area. If you are flipping, then you need to buy at a discount and be able to do repairs cheaply enough that you will come away ready to sell at a profit – even assuming that property prices remain relatively unchanged. You also need to be able to cover costs or sit on a property if the market dips.