Single Family Investment - Creating A Pro Forma

So, you have a bit of money you are wanting to invest in real estate. You have heard single family investing is great place to start. However, you are wondering how to figure out if a property you are looking at is a stud or a dud. Well, that is where we will pick up today, with building a financial model for single family investment. The model we will build is a basic model for a buy and hold strategy (leasing/renting). You will need to have a basic working knowledge of Excel to follow along. The model shown below can certainly be made more robust than what is shown below and is intended to be a building block.

Step 1: Setup up your pro forma using a basic outline for an income statement also known as a profit and loss statement: Revenue > Operating Expenses > Net Operating Income > Debt Service > Cash Flow.

The pro forma shown below is setup for a 5-year holding period with a sale date at the end of year 5.

Pro Forma Setup: Step 1 (Link)

Step 2: Now that your outline is created, you need to input your numbers.

Pro Forma Setup: Step 2 (Link)

I used blue font to indicate my inputs. The cells containing black font are calculations based off of the blue font inputs. In the far-left column labeled “Increases” I used inputs to indicate the automatic annual increases for certain revenue and operating expense items.

At the end of year 5, the sale of the property takes place. I used 6% for the sales cost and a capitalization rate of 6% to value the property based on the year 5, T-12 net operating income of $10,890.51. This leaves proceeds of $170,617.95 before the remaining principal is payed off.

Cash flow for year 5 is calculated by first subtracting debt service ($6,062.10) from the net operating income $10,890.51, giving you $4,828.41. Next you take the “Proceeds” $170,617.95 and subtract the remaining principal of $100,909.21, giving you $69,708.74. Cash flow for year 5 is $4,828.41 + $69,708.74 = $74,537.14.

DSCR is based on operating cashflow and does not include the profit from the sale in year 5. “IRR” and “Multiple” under “Returns” does include the sale in year 5 cashflow.

That is basically it. Based on the numbers, this seems like it would be a good investment to move forward with. Some improvements to this pro forma could be to add inputs for initial repairs/improvements, carrying cost/downtime, etc.

I hope you found this useful. Please let me know if you have any feedback or questions.