Pro-Forma vs. Historical Performance

If you are new to analyzing properties as potential rental units, you may not be completely aware of the information we need from sellers in order to be able to evaluate them. In order to properly run the numbers to calculate Net Income (Cash Flow), Capitalization Rate (CAP), and Cash on Cash Return on Investment (CoC or ROI), you will need historical performance records on the property, better known as an Income and Expense statement. Minimally, we need that information for the past tax year, and preferably for the past two years. Since this information must be reported in tax returns, it is not uncommon to ask for the Schedule E (Income or Loss from Rental Properties) form for the past two years on the property, or other equivalent tax form.
It is relatively common in the industry for an agent or seller to prepare what is often called a Pro-Forma on the property. It may be well-intentioned, but a Pro-Forma is basically a prediction of how the property will perform under new ownership. Using a Pro-Forma to evaluate a property is problematic at best. First, in order to complete the form, the author must make some assumptions, which may very well NOT be accurate, such as the type of loan, interest rate, etc. that the buyer will choose or qualify for, future vacancy rates, etc. We actually use a term to assess the value of these numbers-- we say that they are PFA, which stands for "Plucked from Air (that's the nice version, you can supply the other term.) In other words, it's worthless information.
Second, and more importantly, we are having "crystal ball" information substituted for hard factual historical information, and that is just intolerable.
As you begin analyzing rental properties, do not let people take advantage of you by providing you with a Pro-Forma. Request, and expect Income and Expense information, preferably for the previous two tax years.
If there is interest in more on analyzing rental properties, I am happy to post more on Cash Flow Analysis, CAP Rates, ROI, and other calculations that can be useful in this process--let me know.