Understanding Pro Forma for Successful Multifamily Apartment Investing

Pro forma are projections of the performance of the deal. They are usually based on a proposed business plan.

As with all projections, take it with a grain of salt. Know where people's incentives lie, even with people you know to be honest.

The broker provides a pro forma in their OM marketing packet. Their incentive is aligned with selling the deal and making the returns for the next buyer seem good.

The syndicator needs return metrics to be at least 80% total return to investors within a 5 year period or else they probably won't be able to raise money for it. Their incentives are aligned by making the deal hit these return metrics as shown by projections.

Are they necessary?

Yes, because almost all large multifamily deals are sold based on pro forma numbers, not current numbers. What this means is that some of the upside is tied into the sale price. It's your job to do your own research and determine how much more. If your offer price on large apartment buildings is only off of the current rents, you'll probably never get a deal because other people will bid higher.

A pro forma is going to have all your income and expense line items. To get this as accurate as possible, make sure you, or the syndicator you're investing with has gotten actual bids for their expense. Make sure they have actually called the comps and found out exactly what comparable rents are in the area. These comps should be in the same neighborhood if possible and not separated by any major roadways.

What to take away from it?

Do your own research and don't blindly trust the pro forma of someone else.

Try to pick deals where the deal still makes sense, or at least is heavily protected based on the current numbers, not just by the projection. You want to eliminate as many assumptions as possible in order for the deal to work.

Note where the broker or syndicator heavily speculates on their assumptions that aren't based on bids or historic data. As Warren Buffett says, "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."