Proformas 101: Get Acquainted with the Basics of Real Estate Investing
/There are so many real estate investment opportunities available to individuals and families. Saint is here to help you understand the possibilities and give you the expert advice you need to make informed and strategic financial decisions. As a trusted partner eager to help you achieve your goals, we're breaking down some of the basics regarding real estate dollars and cents.
Let’s start with the basics, then dive into the details.
What is a Proforma?
A proforma analysis is a set of calculations that quantifies the revenue that a proposed real estate development will likely create. It breaks down the project's land, soft, hard and out of pocket costs against the market return to project the potential return on investment.
Why a Proforma is Important
A proforma not only indicates in a summarized format whether a project will be profitable, it also prepares the developer for the capital requirements both before a Building Permit is issued and all the way through construction, so project viability can be assessed. A multi-family project is sometimes also broken down by cost and revenue per unit. The more comprehensive the proforma, the more confident the developer can be in the end result.
This initial cost analysis is what indicates a successful real estate project. It's like a quantifiable pro/con list demonstrating the expected return on investment.
Since most costs are incurred before sales can begin, investors often fund development projects until construction financing is available. Investors are repaid at project completion with a predetermined profit-sharing model based on their number of shares.
What's Included in a Proforma?
As a potential investor, you'll review the soft and hard costs required for a development, including items such as land acquisition, planning, design, construction, municipal and sales fees as well as financing costs, listed on a proforma.
The developer, in this case, Saint, performs a market analysis to understand the appropriate sales value of multi-family homes in the area. Our years of experience and industry connections also come into play here, drawing on past and current knowledge of project success criteria including current market expectations and demand as well as future trends. By specializing in multi-family homes in East Vancouver, we've created a wealth of expertise and understanding of this specific market, making us confident in our development projects.
We do our due diligence by researching pending developments in the area, land assemblies, zoning changes, character merit and project cost variables. We also consider the potential buyers’ needs and work with our architects to design highly livable and functional spaces for evolving families’ needs.
A more in-depth proforma may include a cash flow analysis that breaks down a timeline of costs and investment loan payments. A cash flow analysis shows the impact of time on the project's feasibility, as a project that takes longer to complete will inevitably incur more costs (interest, site staffing, variability of material costs). Financing needs are best understood when a project's schedule is confirmed.
Knowing how to read a proforma can help you understand the potential risks or outcomes and feel confident in your investment.