In my previous post, I laid the groundwork for completing a pro-forma financial analysis for a potential business focused on buying, rehabbing, and holding/renting single family houses. An earlier post defined a hypothetical, yet realistic scenario for acquiring these properties, and my previous post defined the assumptions around my expected business model, revenue, costs and volume.
Now that we have all this data, we should be able to put together a 5-year pro-forma financial statement for this potential business. While I won’t provide all the financial data that would/will go in the business plan, a simple income statement should suffice to determine whether this plan has economic merit, and to what degree.
If you recall from the previous article, we enumerated all the major income/expense line items that we could expect:
- Acquisition Costs: Expense of $12,000 per property, with expected volume at 6-8 properties per year
- Annual Sale Proceeds: Income of $40,000 per property sold, with expected volume between 2-5 properties per year
- Sales Commission: Expense of $7,200 per property sold
- Cash Flow: $862-$1615 per rented property per year, depending on the length the property has been held
- Salaries: $90,000 per year
- Final Sale of Inventory: Average proceeds of $51,692 minus $7,758 in sales commissions for each of the 18 properties held after 5 years
Combine this with the specific annual volume data provided in the last post:
and it should be fairly straightforward to put together a 5-year pro-forma income and cash flow analysis, as follows:
From this, you should notice a few things:
- Over the 5 years, assuming this model proves accurate, the business should earn about $548K in profit;
- The largest negative net cash flow throughout those 5 years is just over $240K.
Therefore, with a $250K investment into this business, you shouldn’t have to worry about any liquidity issues, the total return you should expect from this business is:
Not too shabby for a first pass; and in addition, there is probably some room for additional upside:
- In the first five years, over $262,000 is spent on realtor commissions; by having one of the companyâ€™s employees earn their real estate license, 50% of those fees can be returned to the company. This would add up to another 50% to the total return
- The assumptions used to calculate both future cash flow increases and property value increases are very conservative. As the real estate market picks up again in the next 5 years, both rental rates and property values may increase much more quickly than what is projected in this model