Pro Forma
A pro forma is a projected financial model for a rental property. It estimates what the property will earn, what it will cost to operate, and what returns it will produce — before you own it. The word comes from Latin meaning "as a matter of form."
Every seller provides one. Every investor should rebuild one from scratch before making an offer.
Two kinds of pro formas
| Type | Who creates it | Purpose | Default bias |
|---|---|---|---|
| Seller's pro forma | Listing agent or seller | Market the property | Optimistic — maximize NOI appearance |
| Investor's pro forma | You | Underwriting — make an investment decision | Conservative — survive stress tests |
Your job is to take the seller's pro forma, find every optimistic assumption, replace it with a realistic one, and see what the deal looks like under your numbers. Deals that survive this process are worth pursuing. Deals that only work under the seller's assumptions are not.
The components of a rental property pro forma
| Section | Line items |
|---|---|
| Income | Gross scheduled rent, other income (laundry, parking, storage) |
| Vacancy & credit loss | Vacancy allowance (% of gross rent), credit loss |
| Effective gross income | Gross rent − vacancy − credit loss |
| Operating expenses | Taxes, insurance, maintenance, management, utilities (if any), landscaping, snow removal |
| Capital reserves | Future major expenses: roof, HVAC, appliances, plumbing |
| NOI | Effective gross income − operating expenses − reserves |
| Debt service | Annual mortgage payment (P&I) |
| Cash flow | NOI − debt service |
| Returns | Cap rate, DSCR, cash-on-cash return |
Worked example
Two pro formas for the same $160,000 / $1,800-month property: the seller's version and a conservative investor remodel.
| Line item | Seller's pro forma | Investor's pro forma | Difference |
|---|---|---|---|
| Gross rent | $21,600 | $21,600 | — |
| Vacancy | 2% ($432) | 8% ($1,728) | − $1,296 |
| Taxes | $2,100 | $2,600 | − $500 |
| Insurance | $800 | $1,100 | − $300 |
| Maintenance | $600 | $1,600 | − $1,000 |
| Management | $0 (self-managed) | $1,944 (9%) | − $1,944 |
| Capital reserves | $0 | $1,080 (5%) | − $1,080 |
| NOI | $17,068 | $11,548 | − $5,520 |
| Cap rate (on $160,000) | 10.7% | 7.2% | − 3.5% |
| Annual debt service | $9,588 | $9,588 | — |
| Cash flow | $7,480 | $1,960 | − $5,520 |
The seller's pro forma shows a $623/month cash flow deal. The realistic model shows $163/month. Same property, same price, different assumptions.
That $5,520 annual difference is entirely from:
- Restoring realistic vacancy (+ $1,296 in expense)
- Correcting understated taxes (+ $500)
- Adding realistic maintenance (+ $1,000)
- Adding market-rate management (+ $1,944)
- Adding capital reserves (+ $1,080)
None of these are unusual adjustments. They are simply what accurate underwriting looks like.
How to rebuild a pro forma from scratch
Income:
- Verify the current lease and actual rent
- Cross-check against rental comps for the market
- Apply a conservative rent growth rate if projecting forward
Vacancy:
- Look up the census vacancy rate for the zip code or county
- Do not use anything below 5% unless you have compelling local data
- Add 1–2% credit loss separately if the market has delinquency issues
Operating expenses:
- Get the actual property tax bill from the county assessor (post-sale reassessment matters)
- Get an insurance quote for a landlord policy (not homeowner)
- Use 1% of purchase price per year for maintenance as a starting point
- Include property management at 8–12% of gross rent, even if you plan to self-manage
- Add capital reserves at 5–10% of gross rent depending on property age
Debt service:
- Use your actual anticipated loan terms (rate, term, down payment)
- Model P&I separately from taxes and insurance to avoid double-counting
Common red flags in seller pro formas
| Red flag | What to do |
|---|---|
| No vacancy line or vacancy < 3% | Replace with census vacancy rate |
| No management fee | Add 9% even if you plan to self-manage |
| No capital reserves | Add 5% of gross rent |
| Maintenance < $500/year | Replace with 1% of purchase price |
| Taxes based on seller's current assessment | Request county tax bill; call assessor to estimate post-sale rate |
Frequently asked questions
Is the seller's pro forma legally binding? No. A pro forma is a projection, not a warranty. Sellers are not liable for projection errors unless there is active misrepresentation of material facts. The responsibility to verify falls on you.
How many years should my pro forma cover? For buy-and-hold underwriting, model Year 1 with conservative assumptions. Optionally extend to Years 3 and 5 with modest rent growth (2–3%/year) and expense escalation. Be skeptical of long-horizon pro formas that show dramatically improving cash flow — they amplify optimistic assumptions.
What is a multi-phase pro forma? A multi-phase pro forma models changes in operations or financing at specific points in time — for example, a BRRRR that transitions from hard money (high rate) to a permanent loan at month 6, or a house hack where the owner moves out at year 2 and rents the primary unit. Temelios supports multi-phase pro formas in deal worksheets.
Should I include appreciation in my pro forma? Only separately, not in the core cash flow model. Appreciation is speculative. A pro forma that depends on appreciation to work is not a cash flow deal — it is a bet on price growth. Model cash flow standalone, then add appreciation as a separate sensitivity.
Pro forma projections are analytical tools, not guarantees of performance. Always verify assumptions with current market data and consult qualified professionals before making investment decisions.