What is a Proforma Income Statement?
- Author James Kobzeff
- Published March 3, 2011
- Word count 569
A proforma income statement is a report investors and analysts who are engaged in real estate investing commonly use for the purpose of forecasting the cash flows generated by a rental property. The concept is simple. By projecting out over some number of years the income that a rental property might likely generate, investors and analysts are able to conduct a cash flow analysis that will help them evaluate the future performance of a property during the real estate investing decision-making process.
There are no restrictions on the number of years you want the proforma income statement to project. I've seen real estate investment software, for instance, that create statements ranging from ten to twenty years; a few even boast that their software provides for thirty-year forecasts. However, I personally feel that these longer range projections can become too misleading to be given much weight. There are just too many factors that can alter any cash flow forecast, especially for that many years. My own real estate investment software creates a proforma income statement that allows you to measure the financials for ten years, and I consider that adequate for any investment property cash flow analysis.
Likewise, a proforma is not limited to the type of financial data that it reveals. A good statement should include cash flows, rates of return, and proceeds resulting from a sale (known as reversion) at the very least. But the better ones also include calculations for the elements of tax shelter, so that cash flows, rate of return and proceeds resulting from a sale "after taxes" is revealed as well. I believe that prudent real estate investing decisions should include projections for cash flows and returns after taxes, so my real estate software provides both.
The bottom line, of course, it that you are seeking to evaluate how well a rental property might perform in future years. So whether you prefer to forecast a property's financials out ten or twenty years, with or without taxes, is up to you. The most important thing is that the proforma reflects your own real estate investing objective, and in turn provides the data you require to conduct your investment property cash flow analysis.
Of course, no proforma income statement is worth the paper it's printed on unless the projections you want to make are based upon sound data. For example, if you feel that rental income can realistically appreciate two percent per year, than use that percentage for your forecast, and fight off the temptation to bloat that percentage to three or four percent just because you hope so. You might even consider staggering the percentage of growth just to be safe. Perhaps two percent for the first two years, zero percent for years three and four, and one percent for each year thereafter. My real estate investment software will allow you to do this.
If you are engaged in real estate investing, and choose to create your own proforma income statement, please feel free to refer to mine as a guidepost. You can preview several samples on my website at www.proapod.com under reports for my three solutions. All you will need is a spreadsheet program like Excel, and some extra time. Well, maybe a lot of extra time, but it's worth the effort because you certainly don't want to exclude having a cash flow analysis the next time you invest in real estate.
James Kobzeff is the developer of ProAPOD - superior real estate investment software since 2000. Create a rental property cash flow analysis in minutes! Easy to use and affordable. Learn more => www.proapod.com
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- Understanding Cocaine: Effects, Risks, and Treatment Options Introduction
- 3 Great Passive Income Ideas for New Moms and Dads in 2024
- Avrex IO Redefines Real Estate Investment with Innovative Tokenized Ownership Approach
- Panama City's Real Estate Market: Top Neighborhoods for Investment
- Investing in a Condo or Villa in Pattaya, Thailand
- Tabania Group Rings in the New Year with a Powerhouse of Financial Services, Unveiling a Comprehensive Suite for the Digital Age
- To What Extent Has Economic Growth Improved Quality of Life?
- How to Manifest Wealth in Your Life
- Unlocking the Potential: Making Money Online with Your Phone”
- Blue economy of the world
- This Financial “FORMula” Will Help You Plan Around What Matters Most
- Losing a Parent: A Checklist and Timeline of the Financial Aspects to Address
- How to Avoid Lifestyle Creep: Try this 50/50 Rule for Saving & Spending
- (Money) Date Night: Why You Need One and 5 Topics to Discuss
- Private Placement Life Insurance (PPLI) in Offshore Trust More Useful Than Ever
- Indexed Insurance Policies Hedge against Inflation
- Should You Invest Abroad? A Complete Guide to Buying Investment Properties in Thailand
- What Are Your Retirement Planning Options?
- Daily Income Opportunity With U-Farm
- Building a Comfortable Retirement: Tips and Strategies for Investing in Your Future.
- Revocable Living Dynasty Trust (RLDT)
- Key Retirement & Estate Planning Tools
- Captive Insurance -- Details
- INDEXED UNIVERSAL LIFE INSURANCE (IUL) ADAPTS TO INFLATION AND HIGH INTEREST RATES
- GRANTOR ACCESS TO IRREVOCABLE TRUSTS -- EASE THE STRESS OF COMPLETED GIFTS
- CASH BALANCE PLUS PLAN
- Tax-Free Income Making More Sense in Global Financial Crisis
- Dynasty Trusts Guard Personal Autonomy in Hierarchic Society
- Captive Insurance Company, CIC -- Reduce Taxes and Build Wealth
- What is an RESP?