Updated almost 11 years ago on . Most recent reply
What is Pro Forma on a flyer/pamphlet telling me
I am looking at some commercial apartment complexes in my area. I am still in exploratory stages but wanted to understand if asking prices on a couple of deals in my area were worth exploring.
On the pamphlet/flyer for the property it gives me a 2014 Pro forma of $32,280. Is the $32,280 stating the proposed 2014 NOI or something else.
In the book, Rich Dad Advisors: ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss by Ken McElroy, he says to evaluate a commercial/multi-unit property and asking price by taking your NOI/cap rate and that should be your offer price.
I understand that you would have to get real NOI calculated by actual data to do a real life offer but wanted to do some analysis first before getting actual data to see if any were in the ballpark. So what is the 2014 Pro forma telling me in this example?
Most Popular Reply
Without seeing the broker packet it's hard to tell. I would imagine it's stated somewhere or can be derived from some basic information on the "pamphlet/flyer" (although I've seen some poor "flyers" on smaller multis). How many units? Rental rate in the area? That should quickly tell you what the broker's pro-forma number is (i.e. 12 unit with rents at $500/month = 72k gross, NOI could potentially be 32k). As you stated be very careful with pro-forma numbers especially on smaller multi-family properties. Brokers dealing with smaller buildings tend to be less sophisticated and can provide wildly unrealistic numbers (not always).
Ask for a current rent roll & prior 2-3 year actuals. Beyond that you will need to understand cap rates in the area you are buying, cost per unit sales comparables (for similar size buildings), and age/condition when comparing to other properties and building your pro-forma.
I would continue participating and learning on BP among many other sources.