Loading...Loading...Note: This is Chapter 3 of an entire guide of How To Buy Your First Investment Property. When you see a property, in-person or virtually, you'll start to have instant opinions on each property.
Note: This is Chapter 3 of an entire guide of How To Buy Your First Investment Property.
When you see a property, in-person or virtually, you'll start to have instant opinions on each property. One property might have an amazing surface value, but deep problems in the renovation. Ultimately, a beautiful property might not look good from a financial standpoint.
This chapter is focused on how to evaluate properties based on the numbers (finances).
💡 Definition
A Pro-Forma is a financial statement used to analyze investment properties that gives approximate projections of anticipated income and expenses. However, it typically does not show operating numbers.
Pro-Formas are always going to be the first step in looking at the financial aspect of an investment home. The selling agent should be able to provide this information to you as a potential buyer. However, note that many pro-formas change in structure even from the same agent as the houses are different. But this becomes less important if you understand the foundation components.
The breakdown of the numbers:
All of the numbers below are typically found on a pro-forma, but as noted before, they sometimes change structure.
The pro-forma should be the first step taken to understand a property's finances to make sure that it makes sense with your investing strategy.
Now that we have an understanding of what a pro-forma is and the key components, we can understand the information and make it into actionable items that can be used to analyze the property. This section becomes a bit more thought-driven, so it may take time for you to analyze a pro-forma.
Note: In the beginning, analyzing a pro-forma takes significant time. Don't worry as you'll get better at it over time, and you'll learn exactly what you are looking for as an investor.
By this point, you'll have an understanding of the important financial operating aspects of your home. And now is the fun and more creative part.
You will want to look at the numbers and the possibilities to increase income and/or decrease expenses. In an ideal scenario, there would be multiple action items that you could do to do both increasing the potential upside of investing in the property.
For example, a property might be currently rented out for below market value in comparison to other properties. This means that rent could potentially be increased to increase income. Another example could be that you could increase the value of a property by performing more extensive renovations, which will then defer maintenance that might add into your expenses later.
Below, you'll find a few of the questions you should ask yourself when creating your Action List.
This list is obviously not exhaustive, but would be a good starting point for you!
At the end, after analyzing 10 different pro-formas, you might only come out with 1 that you truly like and resonate with. It's time to make and pursue the deal!
To recap,
The next chapter will be focused on how to approach the deal, making offers, and more!
Doorvest combines market selection, underwriting, renovations, and property management in one platform.
More guidance on financing, underwriting, taxes, and managing rental homes.
Cash-on-cash return matters because it answers a question investors actually care about: what return am I earning on the cash I had to put into this deal? That makes it one of the most practical metrics in single-family-rental underwriting, especially when financing is involved.
Total ROI matters because rental-property returns rarely come from one place.
Appreciation matters because long-term wealth in real estate often comes from both income and equity growth.
