MAC Users Will Be Able to Use ProAPOD (Again)

In an article recently posted on ZDNet by author Mary-Jo Foley, Microsoft will again support its Office application for Mac users with Mac 2011 starting October 26. This is great news for me because it means that real estate agents and real estate investors can once again using ProAPOD Real Estate Investment Software on their Mac computers.

Why Microsoft lifted the support Office 2008 for Mac is beyond me, and most other Mac users (at least this is what I can gather from the vast complaints I found on the web). Anyway, the good news for those engaged in real estate investing who were snubbed by Microsoft with Office 2008 for Mac can again start using our real estate investing software with Mac 2011 to create their rental property analysis and marketing presentations.

If you would like to read the story in its entirety see the complete story here.

How to Create a Real Estate Analysis Without Real Estate Investment Software

If you rather not invest the money into real estate investment software and prefer to create your own real estate analysis, then you certainly can. Rental property cash flow analysis along with rates of return and profitability analysis and marketing presentations can be created by anyone with a spreadsheet program who has the time and patience to do it manually.

First, purchase the spreadsheet program. In this case the obvious choice would be MS Excel for PC users and even for MAC users because MAC does allow you to install and use MS products on your MAC computers. Moreover, MS Excel includes a ton of built-in formulas and features that make it the most-widely used spreadsheet in the world. So you won’t regret having made the investment to purchase it for your real estate analysis.

MS Excel can be purchased alone for around $100 but is regularly included with MS Office. So if you already have MS Office then you’re good to go.

Secondly, get acquainted with the program. Learn what constitutes a “cell” as well as how to format the cell. You will have to decide whether the data entered into the cell should be considered as text, a number, or percentage, and whether you would like the number to include a dollar or percentage sign, commas inserted for every 100, and how far right of the decimal point you want to carry your numbers. You also need to consider such things as background colors, borders, font-size style, and cell size.

None of this is trivial and will be extremely useful once you start creating the reports you want to include as presentation material for your real estate analysis.

Thirdly, learn VBA (or visual basics for applications). This is the computer language for Excel that creates macros (procedures) that do something. For example, in my real estate investment software I rely on macros to create the toolbar and then to do something when some particular portion of the toolbar is clicked (e.g. the picture command enables users to select a picture from their computer and then automatically posts it into one or more reports). Macros can also be called from whatever form you’re using by including them in Excel’s built-in functions such as Worksheet_Change ().

You probably can get by without using VBA to write your own macros, but it will automate a number of features for your cash flow analysis if you take the time to learn it.

Fourth, learn how to use Excel’s formulas. One of the great advantages of using MS Excel is that it includes a wide-range of built-in functions that automatically compute such things as PMT (a mortgage payment), IRR (an internal rate of return), and NPV (a net present value) all based upon certain criteria. The problem here (at least as I discovered when developing my real estate investment software) is that the formulas don’t always produce the result expected. Some times, for instance, a number has to become a negative for the formula to compute correctly (though this is not made clear by MS). So it’s trial and error.

Fifth, you will have to learn how to compute the essential cash flows, rates of return, and profitability numbers that are essential to a real estate analysis. This has nothing to do with MS excel. You simply need to be able to compute the key real estate investing formulas for any cash flow analysis.  For example, cash flow before tax (CFBT) and cash flow after tax (CFAT), cap rate, gross rent multiplier, cash-on-cash, break-even ratio and so forth, as well as all the elements of tax shelter.

This is imperative. If you choose to create your own real estate analysis without the benefit of real estate investment software you must understand all the cash flow, rate of return and tax formulations otherwise you are sunk even before you set sail.

Finally, you will need to know how to create the essential real estate investing reports used for cash flow analysis. My own real estate investment software creates a wide-range of reports (and charts) but at the very least you will want to create an APOD and Proforma Income Statement. Feel free to see sample screen shots of all my reports on my website. Here’s to your success; may your real estate analysis spreadsheet serve you well.

How to Evaluate Investment Property Future Cash Flow Performance with a Proforma

A Proforma Income Statement (or proforma) is a proven way for real estate investors to evaluate the future cash flow performance of investment properties. Better than an APOD (which merely shows a property’s cash flow for the first year), proforma income statements enable investors to project-then-evaluate the investment real estate’s cash flow, tax benefit or losses, sales proceeds, and key returns out over a number of years.

The method is straightforward. The proforma starts with a property’s financial data in the first year then applies a set of variables to make projections for the second year, then repeats the process for the third year, again for the fourth year, and so on; in each case, always applying a variable (of your choice) to the previous year in order to compute the revenue projections for the following year.

For example, if last year’s income was $30,000, the operating expenses $12,000, and the net operating income $18,000 ($30,000 income – 12,000 operating expenses), and you would like to determine next year’s net operating income in the event revenue increases 5% and operating expenses increases 4% you would compute next year’s net operating income as follows:

*Revenue less Operating Expenses = Net Operating Income
*Revenue = $30,000 + (30,000 x .05) = $31,500
*Operating Expense = $12,000 + (12,000 x .04) = $12,480
*Net Operating Income = $31,500 – 12,480 = $19,020

The same would hold true if you expect the vacancy rate to change from one year to the next. Say, for example, that the gross scheduled income for the rental property is $40,000, the vacancy rate is 10% and the gross operating income is $36,000 ($40,000 gross scheduled income – 4,000), and you want to decrease the vacancy rate to 5% the following year. Then you would compute next year’s gross operating income as follows:

*Gross Scheduled Income less Vacancy Allowance = Gross Operating Income
*Gross Scheduled Income = $40,000
*Vacancy Allowance = $2,000 (40,000 x .05)
*Gross Operating Income = $40,000 – 2,000 = $38,000

This is the pattern for each year in the proforma starting with the end of year one and extending out through the end of year ten (i.e., EOY1 through EOY10). Specific variables are applied to this year’s data to recalculate the rental property’s financial performance for the next year. Including revenues, operating expenses, cash flows (before and after tax), tax liability, sale proceeds, and returns such as cap rate, net present value, and return on equity (depending on your particular proforma).

How do you create a proforma income statement?

1) You can invest in real estate investment software that will automatically create a proforma income statement for you. Just bear in mind, however, that software solutions tend to vary and whereas one might include computations for tax shelter, another might not.

2) You can use an Excel spreadsheet and manually create a Proforma Income Statement. Of course it helps to have some knowledge of Excel, and you should allow yourself plenty of time to create a good proforma.

Whatever method you choose, though, real estate investment software or a spreadsheet, here are a few important considerations to keep in mind about your statement.

1) Consider what you are seeking to accomplish with the proforma. You want to analyze the cash flow and other performance measures resulting from changes to such variables as income, operating expenses, and property value over future years.

2) The pro forma is just an estimate (a guess). Do not rely solely upon a proforma income statement to make your investment decision.

3) Though a proforma can be constructed to project any number of future years, because it is speculative, you might not want to go out further then ten years (I wouldn’t).

4) Be sure to use realistic numbers. Start with the current income and expenses and apply reasonable variables. Don’t inflate income 10% (for instance) when 2-3% has been normal for your market over the past several years.

As stated earlier, a proforma is a good way for a real estate investor or analysts to evaluate the future financial performance of investment real estate. Moreover, it makes a good presentation to other investors and lenders because it does peek into the future. You can see a sample Proforma on my website at www.proapod.com. Simply choose one of our three solutions and look at Proforma Income Statement under Reports.