Continuing, we are now in a position to focus on the property.
Because you're astute, you'll know that Building, Location, and Demographics are three criteria about the prospective investment we'll use to evaluate the property but, you ask, where does the Proforma vs. P&L question come in? And because I'm astute, I reply, as an element of the "Building".
We don't have time in a short Blog entry to undertake a study of all of the factors that an investor will consider that are personal, so let's assume we're just looking for something that makes good business sense to a wide group of investors. Are there some investors who will only buy 10% CAP rate properties? Sure. Are there some investors who will only buy Class A properties, with a CAP rate of 7%, or even less? Sure. But let's assume we're just looking for an investment that will support our magical 80% LTV criteria, AND the owner will either be able to provide the most recent two years of a P&L Statement, or their Agent will furnish a Proforma.
If you're the Buyer, and I'm representing your interests, which do you want me to find?
Answer: The P&L statements. Many Proformas aren't worth the paper they are written on. The Agent is blowing smoke, trying to trick us into believing that the current owner is an idiot for renting out his/her units too cheaply but because you're a genius owner, you're going to immediately raise the rents to where they "should be" for this building, and they'd like you to use this Proforma Income Statement as the means to establish value.
Not only am I not going to buy that story, I'm definitely going to suggest that you not buy it, even if you are tempted, unless we can establish a good reason for so doing.
And that is the basis of the discussion for Part 3 or 3 -- Exercising Due Diligence as we establish our own Proforma, based on the P&L