What To Look For When You Read A Duplex Pro Forma

If you’re thinking of buying a rental property, there are two kinds of financial documents the listing agent or seller may provide upfront. One is a pro forma. The other is a P & L or profit and loss statement.

So what’s the difference?

A pro forma is a projection. It’s the seller or their Realtor’s forecast of how the property would perform financially if all the conditions set forth in their worksheet existed. There are three to watch most closely: interest rates, vacancy rates, and repairs/capital expenditures.

For example, I recently saw a pro forma worksheet on a small apartment building that used a 5 percent interest rate and a 2 percent vacancy rate.

Neither of those terms exists in the Twin Cities market right now. When numbers from the real world were plugged in, the property immediately became less financially attractive.

In other words, the pro forma didn’t really paint an accurate picture.

On the other hand, a P & L should reflect the property’s actual income and expenses. There too it’s important to look for places the seller may be understanding; most notably in maintenance and improvements.

Of course, when it comes to acquiring a larger rental property, a buyer can always make the purchase contingent upon reviewing the seller’s Schedule E that was filed with the IRS. If there’s any place someone is likely to accurately report a property’s expenses, it’s there!