Here’s the next podcast in the commercial real estate loan series!
Let’s talk about what a property’s pro forma number really means and how it affects any potential loan that may be taken out for the property.
Featuring:
René Nelson, Eugene commercial real estate broker
Isaac Grant, Eugene commercial loan officer
Investing with Commercial Real Estate Loans – Part 7
René Nelson: Joining me again as Isaac Grant from Oregon Community Credit Union. Hey, Issac.
Isaac Grant: Pleasure to be here again, René.
René Nelson: Okay, so for all of the listeners out there that are interested in buying a multifamily property, as a broker a lot of people will call me and say, “Hey, I want to buy a 10 unit, or I want to buy a 20 unit apartment complex, or I have a million dollars to invest.” So the first thing that I do is I go out to all my sources and look and see what’s available in the market. Frequently, brokers will put together these marketing packages and they’re anywhere from 10 pages to 45 pages. Some of it’s all fluff, it’s pictures, it’s demographics. That stuff’s helpful, but where the rubber meets the road are the numbers and here’s where I see people get into trouble.
A lot of times a broker is trying to make that property look a little better than it really performs. And so what they’ll do is they’ll have a column that says here’s today or trailing 12, but then they’ll have a pro forma number. And that pro forma number they’ve used future income, but last year’s expenses, and you have to stretch so hard as an investor that you’re probably going to have high vacancy, you’re going to have issues with your property, and you’re probably going to go in the ditch if you look at that pro forma number. And that’s what you base your decision off of. Isaac, how do you look at a pro forma situation?
Isaac Grant: Yeah, it’s really important for us, René, when analyzing how much debt, what size of a loan is this property going to be able to support? So the most important thing we’re going to look at is what’s historically happened and what’s in place right now. So we’re going to want to see a rent roll for that property. And then we’re going to do our due diligence to verify that what that rent roll is showing is actually what’s in reality. Especially at the moment, people are maybe deferring their payments, people maybe we got behind on some rental payments.
So we’re going to do a little bit of extra due diligence, but it’s good for you as well as the applicant, because you want to know, what am I actually purchasing? What’s the level of income actually being generated by this property? Then we’ll look forward on the pro forma, which is a projection and say, “Okay, are the in-place rents below market? Is there actually a case to be made that these future projections, these future pro forma is achievable? Yes or no? And to what level and how much time do we think it’s going to take for you to be able to get those higher rents?”
René Nelson: That’s fantastic. Isaac, thanks for joining me. Come back for one more show.
Isaac Grant: Absolutely.
If you’d like help understanding the true income value of a property that you’re interested in investing in, schedule a 15-minute discovery call with expert René Nelson today.
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