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Pro Forma Analysis Cash Flow Forecasting

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Pro forma analysis cash flow forecasting
Apartment Investment Case Study Scenario
An investor is considering buying an apartment building with 140 units offered for sale at $16,500,000. The subject apartment building has the following unit mix:
Additionally, the following assumptions are also being made by the investor in order to construct a 5-year cash flow pro forma:
Vacancy and Credit Loss
In the current market, vacancy and credit losses are running at 9%. Due to the improving market conditions as well as the investor’s prior experience leasing and operating multifamily buildings, it’s expected that vacancy will steadily decline over the next 5 years to 5%.
Potential Rental Income
Potential rental income is based on the above unit mix. The 1-bedroom and studio rental rates are expected to increase at 1% annually. The 2-bedroom units are expected to increase at 2% annually.
After a preliminary discussion with a relationship manager at a local bank it’s determined that a loan can be extended based on the lesser of a 1.25x debt service coverage ratio or 80% loan to value. Additionally, assuming the underwriting process doesn’t reveal any red flags, it’s expected that the loan will be based on a 20 year amortization and a 6% interest rate.
Operating Expenses
The following table breaks out historical operating expenses for the property as well as projected increases over the holding period. Reserves for Replacement
In addition to the above operating expenses a reserve for replacement of $250 per unit will also be included in this analysis.
Sales Price and Cost of Sale
The projected sale price is estimated by applying a conservative 3% annual growth rate to the acquisition price of the property over the 5 year holding period. Additionally, a 6% cost of sale is factored into the net sales proceeds to account for selling costs.

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