What is the primary purpose of a pro forma in real estate investment?

The primary purpose of a pro forma in real estate investment is to project future financial performance and cash flows of a property. This involves creating a forecast that includes anticipated income from rents, potential operating expenses, capital expenditures, and overall expected returns over a specific period.

Investors and stakeholders use pro forma statements to assess the viability of an investment by estimating how much money a real estate property can generate in the future, allowing them to make informed decisions based on this projected financial data. This is essential for evaluating the potential success of an investment and for securing financing, as lenders and investors often rely on these projections to gauge risk and return.

Having a pro forma helps to set expectations and serves as a baseline for comparing actual performance against projections, providing insight into how well the property is performing compared to initial assessments.