Make Your Most Effective Case to Clients, Colleagues, and Customers
I’ve done a good deal of teaching about the process of underwriting real estate investments, particularly income-producing properties. I’ve seen some good approaches and some not so good.
Chances are, if you’re doing a pro forma workup, it’s not just for your own benefit, but also to convey your point of view to a third party. You might be telling the seller or a potential lender, “Here’s what I think is a fair price for this property, and why.”
When my students were taking a first stab at building a pro forma, I would often need to remind them to keep the recipient in mind. If someone were looking at your report and trying to make a data-driven decision about the property, could they follow your reasoning easily, or would it feel like you sent them on a scavenger hunt to look for relevant information?
The Linear Path
My advice was to build out the analysis in a linear path. First, the terms of acquisition: price, closing costs, financing. Then the revenue stream: rent, pass-through recoverables. Then everything that the revenue would have to cover: vacancy loss, operating expenses, debt service, capex. That all leads to cash flow. Next, the disposition of the property: costs of sale, mortgage payoffs. And finally, the “big picture.” How did your invested capital perform over the entire holding period?
I boiled it down into this flowchart that I’m reproducing here.
Does it match how you think about it, or would you structure it differently?
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