Pro formas are the business plans of the real estate development world.<\/p>\n
They give you a snap shot into the future given the data available and your sense of the current and future market.<\/p>\n
When evaluating a potential development opportunity, you can’t get anywhere without making a sound case for your development to potential lenders, partners, and internally.<\/p>\n
That sound case starts with and gets honed through building and understanding your pro forma.<\/p>\n
Like any skill set, becoming proficient at modeling a pro forma takes time, trial and error, and patience (and plenty of frustration too). The larger a deal gets, typically the more detailed the pro forma gets. However, many times the mechanics and foundation of your pro forma will stay the same regardless of the deal size (i.e. money goes into a project, that money creates\/improves something, money comes out).<\/p>\n
Building and using a pro forma is certainly a skill set that’s important in the real estate game. \u00a0Like any skill set, baby steps can grow into walking, walking can turn into running, running can turn into sprinting. \u00a0At the same time, skill sets can be softened, forgotten, or even lost.\u00a0So starting, maintaining, and\/or improving one’s modeling skill set is always encouraged in my book.<\/p>\n
There are many strategies and techniques one can adopt to quickly improve and\/or learn. \u00a0Here are a few I think are the most effective:<\/p>\n
I’m a huge fan of not reinventing any wheel you can. \u00a0Yet building a pro forma from scratch can be a valuable undertaking that could pay dividends in the future.<\/p>\n
Motivation tends to be lower for fictitious projects. So pick out a project that could turn into a real deal. Maybe it’s a vacant lot down the street that you’ve always wanted to develop. Maybe there’s an underperforming multifamily property close by that could use a facelift.<\/p>\n
Regardless of the property or deal, the point is to sit down and start<\/strong>.<\/p>\n It is scary to sit down with a blank spreadsheet and have to plan out how to build a fully functioning pro forma<\/a>. \u00a0Like any epic saga one is about to embark on, a sense of nervousness always surrounds this stage because of the anticipation of changes, adjustments, and dead-ends likely to occur. \u00a0Yet for the time invested, I believe it’s worth it to try.<\/p>\nBedtime Reading<\/b><\/h2>\n