Quick answer
A rental property pro forma is a projected income and expense model that tells you whether a property is worth buying. You build one by pulling market rent from comps, applying a vacancy assumption backed by local data, listing every operating expense, calculating NOI, adding your financing costs, and computing the four metrics that decide a deal: cap rate, DSCR, cash flow, and cash-on-cash return.
This article walks through that build from a blank slate — line by line, with the numbers that matter and the decisions each one requires.
Who this is for
This is for new investors building their first rental analysis model. It covers every input in a standard buy-and-hold pro forma and explains what to use for each one.
For auditing a pro forma the seller already provided, see How to Verify a Seller's Pro Forma Before You Believe It. For the 7-step analysis workflow, see How to Analyze a Rental Property.
The structure of a rental pro forma
A single-property pro forma has three sections:
- Income — Gross rent adjusted for vacancy
- Expenses — Operating costs, not including the mortgage
- Returns — NOI, then the four metrics that use it
You work top to bottom. Errors in the income section compound into errors in every metric below it. Get income right first.
Section 1: Income
Line 1: Gross rental income
Gross rental income is what the property would earn if fully occupied at market rate, month after month. The source is comps — not the seller's estimate, not Zillow's Zestimate, not what the property was renting for five years ago.
How to find market rent:
- Search active rental listings within a half mile for properties with similar bedroom count, square footage, and condition.
- Look at three or more comparable listings and take a defensible midpoint — not the top of the range.
- Call or text a listing agent to confirm the price is real and the unit is available.
- If you have access to a property manager, ask what they would expect to rent the property for today.
If the property is already occupied, check whether the in-place rent is at, above, or below market. Above-market in-place rent is a liability — when that tenant leaves, you will have to cut rent to re-lease.
Enter monthly gross rent, then multiply by 12 for the annual figure.
Free sources for rental comps: Zillow, Redfin, Apartment List, Rentometer, local property managers. See Free Resources for Real Estate Market Research.
Line 2: Vacancy allowance
Vacancy rate accounts for the time the property is empty — between tenants, during lease-up, or while you are dealing with a late payer. It is the most commonly understated input in seller pro formas.
Vacancy allowance (monthly) = Gross monthly rent × Vacancy rate
Where to find the vacancy rate:
- data.census.gov, American Community Survey table B25004 — rental vacancy rate by ZIP or census tract. This is the most reliable neutral source.
- The U.S. rental vacancy rate from FRED (St. Louis Fed) provides national context — 7.3% as of Q1 2026.
- A local property manager can tell you how many days units typically sit before being rented.
A reasonable baseline for most residential markets is 7–10%. Below 5% should be backed by evidence. If a seller shows 3% and the census data shows 8%, use the census rate. For more on how to set and defend this assumption, see Vacancy Rate: The Metric That Can Break a Rental Pro Forma.
Effective gross income = Gross rent − Vacancy allowance
Pro forma income section (example)
| Monthly | Annual | |
|---|---|---|
| Gross rent | $1,780 | $21,360 |
| Vacancy (8%) | −$142 | −$1,709 |
| Effective gross income | $1,638 | $19,651 |
Section 2: Operating expenses
Operating expenses are every recurring cost of owning the property that is not the mortgage payment. Do not include the mortgage here — NOI is pre-financing by design.
Line 3: Property taxes
Pull from the county assessor's or treasurer's website — not the listing sheet. In some markets, properties are reassessed when they sell, which can increase the tax bill significantly from what the current owner pays. Verify what the tax will be after your purchase, not what it was last year. The Tax Foundation's property tax data by state and county provides useful context on typical effective rates in your target market.
Line 4: Landlord insurance
Landlord insurance is different from homeowner's insurance and typically costs more. Older properties, properties in certain markets, and properties with prior claims can cost significantly more to insure. Get a quote before you complete your analysis — do not estimate it from national averages.
A rough baseline for properties that cannot be quoted quickly: 0.5–1% of property value per year. But get a real quote. Steadily offers fast landlord insurance estimates.
Line 5: Property management
Include a property management expense even if you plan to self-manage. This is not optional.
- A property manager typically charges 8–12% of collected rent plus a leasing fee (often one month's rent per new tenant).
- If you self-manage, that 8–12% represents your economic cost — you are doing the work instead of paying for it.
- A deal that only works because you exclude management is not a deal; it is unpaid labor.
If you use a management company, also model the leasing fee as a separate line or fold it into your annual vacancy cost.
Line 6: Maintenance
Budget 1% of property value per year as a starting baseline for maintenance — cleaning, minor repairs, landscaping, appliance service, and recurring upkeep. Older properties and multi-unit buildings often run higher.
Do not use $0. Do not use $500/year for a $200,000 property. Use a realistic number and accept that maintenance is variable — some years are cheap, some are expensive.
Line 7: Capital reserves
Capital reserves are the money you set aside monthly for large, infrequent expenses: roof replacement, HVAC, water heater, plumbing, foundation repairs, appliances. These are not emergencies — they are predictable costs you are deferring until they are due.
Budget 5–10% of gross rent monthly. A property with $1,780/month gross rent should have $89–$178/month going into a reserves account.
This is the most commonly omitted expense in beginner pro formas. Omitting it does not make the expense go away — it just means you will pay it from savings when it arrives.
Line 8: HOA, utilities, and other costs
If applicable:
- HOA fees (confirm monthly amount and special assessment history)
- Any utilities you as the landlord are responsible for — lawn, trash, water in some multifamily arrangements
- Leasing and turnover costs beyond the management fee — painting, cleaning, carpet, lock changes at turnover. If you expect one turnover per year, budget one month of rent-equivalent for this.
Pro forma operating expense section (example)
| Monthly | Annual | |
|---|---|---|
| Property taxes | $233 | $2,800 |
| Landlord insurance | $100 | $1,200 |
| Property management (9%) | $147 | $1,769 |
| Maintenance (1% of value) | $125 | $1,500 |
| Capital reserves (7%) | $125 | $1,495 |
| Utilities (landlord-paid) | $50 | $600 |
| Total operating expenses | $780 | $9,364 |
For a reference on which of these expense categories are deductible for rental property tax purposes, see IRS Publication 527 (Residential Rental Property).
Section 3: NOI and return metrics
NOI
NOI — Net Operating Income — is effective gross income minus total operating expenses. It measures what the property produces before you pay the bank.
NOI = Effective gross income − Total operating expenses
Using the example above: $19,651 − $9,364 = $10,287 annual NOI.
Run this in the NOI calculator. The calculator forces you to enter each component separately, which surfaces the assumptions that are easiest to gloss over.
Cap rate
Cap rate is NOI divided by the purchase price, expressed as a percentage. It is the property's yield independent of financing.
Cap rate = NOI ÷ Purchase price
Compare your cap rate to what similar properties are trading at locally. If your cap rate is well above the local market average, check whether the deal reflects higher risk — thin tenant demand, deferred maintenance, or a harder-to-finance property type. Use the cap rate calculator.
Add financing to get to cash flow
Now add your loan. Financing is what separates NOI from cash flow.
Annual debt service = Monthly P&I × 12
For a $124,000 loan (80% of $155,000 purchase price) at 7.25% for 30 years: monthly P&I ≈ $847. Annual debt service ≈ $10,164.
Annual cash flow = NOI − Annual debt service
Monthly cash flow = Annual cash flow ÷ 12
Run this in the cash flow calculator.
DSCR
DSCR is NOI divided by annual debt service. It tells you whether the property can carry its own loan from rental income.
DSCR = NOI ÷ Annual debt service
Test in the DSCR calculator. If DSCR is below your lender's minimum, you may need to negotiate the price down, put more cash down to reduce the loan, or walk away. For how DSCR and seasoning requirements factor into investment property refinancing, see Fannie Mae's Selling Guide on cash-out refinance transactions.
Cash-on-cash return
Cash-on-cash return measures your annual cash flow relative to the cash you physically invested — down payment, closing costs, and any upfront repairs.
Cash-on-cash return = Annual cash flow ÷ Total cash invested
Total cash invested = Down payment + Closing costs + Upfront repairs
In this example, the deal clearly needs a lower purchase price, better financing, or a different strategy. The pro forma revealed that honestly. That is the point. Use the cash-on-cash return calculator.
The stress test
A deal that fails the stress test is not worth the time. A deal that passes is worth inspecting.
Reading the pro forma honestly
The example above intentionally produced weak metrics to show what a marginal deal looks like in a model — thin cash flow, borderline DSCR, low COC return. Those numbers are data. They tell you:
- The price is too high for this income level at these financing terms
- OR the financing terms need to change
- OR the expenses need to be reduced before or at closing
- OR this is not the right strategy for this property
None of those conclusions are failures. They are the pro forma doing its job: telling you the truth before you spend money.
The complete pro forma template
| Monthly | Annual | |
|---|---|---|
| Income | ||
| Gross rent | ||
| Vacancy (___%) | ||
| Effective gross income | ||
| Operating expenses | ||
| Property taxes | ||
| Landlord insurance | ||
| Property management (___%) | ||
| Maintenance | ||
| Capital reserves | ||
| HOA/utilities/other | ||
| Total operating expenses | ||
| NOI | ||
| Financing | ||
| Debt service (P&I) | ||
| Cash flow | ||
| Return metrics | ||
| Cap rate | ||
| DSCR | ||
| Cash-on-cash return |
FAQ
How many scenarios should I run?
At minimum, build a base case and a stress-tested case. Adding a "seller's assumptions" scenario makes it easy to compare how far the deal deviates from what was presented. Three scenarios — seller, base case, stress — gives you a full picture of the range.
What software should I use to build a pro forma?
A spreadsheet works fine. The Temelios deal worksheet is built specifically for this workflow. The free calculators at /resources/tools are also useful if you want to verify individual metrics without a full model.
Should my pro forma include appreciation?
Model appreciation as a separate consideration, not a line item in the annual pro forma. Appreciation affects your total return over the hold period — it can be included in an IRR calculation — but including projected appreciation in your operating cash flow analysis gives deals false credit for uncertain upside. Your operating model should work without appreciation. For broader context on where home prices and rents stand nationally, see the Harvard Joint Center for Housing Studies 2025 report.
What about taxes and depreciation?
A standard pro forma uses pre-tax cash flow. Depreciation and tax benefits are real and meaningful, but they depend on your personal tax situation, filing status, and whether you qualify for passive loss deductions. Run those with your CPA, not in the base operating model.
What is the difference between a pro forma and an underwriting model?
They are the same thing. "Pro forma" is more commonly used in real estate; "underwriting model" is more common in finance. Both describe a projected model of income, expenses, and returns for a property.
How Temelios can help
This article is for education only and is not financial, legal, tax, or investment advice. Consult qualified professionals before buying property.