How do you create and analyze different scenarios and assumptions with real estate pro forma software?

1 Choose the right software

The first step is to choose the right software for your needs and preferences. There are many options available, from simple spreadsheets to sophisticated online platforms. Some factors to consider are the cost, functionality, flexibility, user-friendliness, and reliability of the software. You may also want to look for features such as sensitivity analysis, scenario planning, reporting, and data integration. Depending on your project type and size, you may need different levels of complexity and customization.

2 Define your objectives and parameters

The next step is to define your objectives and parameters for your project. What are you trying to achieve and measure with your pro forma? What are the key assumptions and drivers that affect your project's performance? How do you account for uncertainty and variability in your inputs and outputs? You should have a clear and realistic vision of your project's scope, timeline, market, costs, revenues, financing, and exit strategy. You should also have a way to validate and update your assumptions as you go along.

3 Create your base case and scenarios

Once you have your objectives and parameters, you can create your base case and scenarios. Your base case is your most likely or expected outcome based on your current assumptions. Your scenarios are alternative outcomes based on different assumptions or events. You can use your pro forma software to create and compare different scenarios by changing one or more variables, such as occupancy, rent, inflation, interest rate, cap rate, or construction cost. You can also use your software to perform sensitivity analysis, which shows how your results change as you vary one variable at a time.

4 Analyze your results and metrics

After creating your base case and scenarios, you can analyze your results and metrics. Your pro forma software should be able to generate various reports and charts that show your project's financial performance and risk profile. Some of the common metrics that you should look for are net operating income (NOI), cash flow before tax (CFBT), cash flow after tax (CFAT), internal rate of return (IRR), net present value (NPV), equity multiple (EM), debt service coverage ratio (DSCR), and loan-to-value ratio (LTV). You should also be able to compare your results with your objectives and benchmarks, and identify the strengths and weaknesses of your project.

5 Communicate your findings and recommendations

The final step is to communicate your findings and recommendations to your stakeholders and partners. Your pro forma software should be able to export your data and reports in various formats, such as PDF, Excel, or PowerPoint. You should be able to present your pro forma in a clear, concise, and compelling way, highlighting the key insights and implications of your analysis. You should also be able to explain the assumptions and methods behind your pro forma, and address any questions or feedback that may arise.

6 Keep learning and improving

As you use real estate pro forma software, you should keep learning and improving your skills and knowledge. You should always seek feedback and advice from experts and peers, and review your pro forma regularly to ensure accuracy and relevance. You should also keep abreast of the latest trends and developments in the real estate market and industry, and incorporate them into your pro forma as appropriate. By doing so, you will be able to create and analyze different scenarios and assumptions with confidence and competence.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?