It also includes appreciation in the cash flow return, which no one can actually predict.Īnother example of a misleading pro forma is one that is too confusing and complex. This particular pro forma assumes there will be no expenses whatsoever, which is impossible. One example of an overly simple pro forma from a turn-key property provider’s website includes the following: Purchase price, Gross annual rent, Cash flow per month, and Appreciation. However, expenses like legal fees, advertising costs, and taxes can be included under this category. We like to include projected insurance costs. This line on the pro forma can be used for any other expense. If you are planning on hiring a property manager, they typically cost between 8% and 10%. If you don’t plan on taking any compensation for managing the property, it’s still important to include because the property’s financial merit is based on all related expenses. Even if you are planning on managing your own property, make sure this line is included because you will want to be compensated for your time and any related expenses. This is often left off a pro forma when a buyer expects to manage the property themselves. Also, after a tenant moves out there will be a period of time where cleaning, painting and repairs will take place prior to the next tenant moving in. Buyers will need to consider the length of their lease and the amount of time the property may be vacant in between tenants. This is typically the highest expense on your pro forma sheet. However, if you are purchasing an older property, buyers may want to consider more than 5%. Typically, putting away 5% of the rent every month will cover any necessary expenses. Even if the property you are buying has been newly renovated, expect to set aside money every month for repairs and maintenance. The four items include, repairs, vacancy loss, property management, and miscellaneous. There are four important items that must be included in a buyer’s pro forma.
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