How to Create a Pro Forma for a Multi-Family Property: Part 2

Here’s a deeper look at how to determine whether a property is a good investment or not.

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Today I’m using the same pro forma example I did in the last video to talk about some more advanced concepts of creating a pro forma and evaluating a multi-family property. The example in question is the 10-property unit in Phoenix, and there are a few assumptions I’ve made.

The first is a five-year projection with the assumption of selling at the end of the fifth year. The property is also purchased and sold at the same cap rate, and income and expenses increase each year by 3%.

The first concept I’d like to go over is how getting a loan affects your cash flow and return. I inserted the following loan assumptions:

  • Mortgage amount: $412,500
  • Interest rate: 4.5%
  • Amortization period: 25 years
  • Loan term: five years
  • Payments per year: 12
  • Periodic payment: $2,292.81

Our net operating income is $41,610, and by subtracting our annual mortgage payment of $27,514, we get our cash flow before taxes, which is $14,096. With a cap rate of 7.57%, this makes our cash-on-cash return 9.76%.

“Real estate does better than the return your bank account or 401(k) account can bring.”

The next concept I’d like to discuss is taxes. Everyone is different, and you’ll want to consult with your CPA to calculate what your tax rates are, but for the purpose of this example, I added in tax rates for ordinary income, capital gains, and cost recovery. After factoring in those deductions, our real estate taxable income is $7,961. Our ordinary taxable income is $1,990.

How does this affect the sale? Factoring adjusted basis, capital gains, and ordinary income, our sale proceeds before taxes is $227,206, and our sale proceeds after taxes is $203,147. Before taxes, the rate of return at $227,206 is 19.03%. After taxes, the rate of return at $203,147 is 15.4%.

As you can see, in many cases, real estate does better than the return your bank account or 401(k) account can bring.

If you have any questions or you’d like to get a customized pro forma done for a property you’re considering buying, don’t hesitate to reach out to me. I’d love to help you.

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