How to Build a Rental Property Pro Forma
A pro forma is not a prediction. It is a structured argument about a property, and its job is to be checkable.
14 lines
Everything a rental pro forma needs, in the order that stops you double-counting.
What a pro forma is for
A pro forma is a structured statement of what a property should earn under stated assumptions. It is not a forecast, and treating it as one is how people end up defending a spreadsheet instead of a property. Its real job is to make every assumption explicit enough that you — or a lender, or a partner — can attack them one at a time.
Which means a good pro forma is judged on two things: whether the lines are complete, and whether the assumptions beside them are defensible. Precision in the arithmetic is the easy part and almost never where deals go wrong.
The fourteen lines, in order
| # | Line | On the $240,000 example | Note |
|---|---|---|---|
| 1 | Gross scheduled rent | $25,200 | Market rent for every unit, occupied or not. |
| 2 | Other income | $0 | Parking, laundry, pet rent, storage. Recurring only. |
| 3 | − Vacancy and credit loss | −$1,260 | 5% of gross scheduled rent. |
| 4 | = Effective gross income | $23,940 | The income you expect to collect. |
| 5 | − Property taxes | −$3,000 | The reassessed figure, not the seller’s bill. |
| 6 | − Insurance | −$1,400 | A real quote in your name. |
| 7 | − Property management | −$2,016 | 8% — modelled even if you self-manage. |
| 8 | − Repairs and maintenance | −$1,260 | 5%. Routine, frequent, small. |
| 9 | − CapEx reserve | −$1,260 | 5% here; component budgeting says far more. |
| 10 | − Utilities, HOA, licences | $0 | Whatever the owner actually pays. |
| 11 | = Net operating income | $15,004 | The property’s earnings. Financing is not in it yet. |
| 12 | − Annual debt service | −$14,009 | Principal and interest. First appearance of the loan. |
| 13 | = Cash flow before tax | $995 | What reaches your account. |
| 14 | Memo: principal paydown | $1,947 | Real return, not cash. Kept below the line on purpose. |
Line 11 is a wall
The second block: what you actually put in
Cash flow alone tells you nothing about return until you divide it by the money at risk. That figure is its own short block, and it is where closing costs and rehab belong:
| Cash invested | Amount |
|---|---|
| Down payment (25%) | $60,000 |
| Closing costs (3%) | $7,200 |
| Make-ready / rehab | $0 |
| Upfront reserves | Excluded here — include it if you fund it at closing |
| Total | $67,200 |
The third block: the verdict
| Metric | Formula | Value | Read |
|---|---|---|---|
| Cap rate | NOI ÷ price | 6.25% | Compare to local sold comps |
| Cash-on-cash | Cash flow ÷ cash invested | 1.5% | Compare to your alternatives |
| DSCR | NOI ÷ debt service | 1.07 | Compare to 1.25 |
| Operating expense ratio | OpEx ÷ EGI | 37.3% | Sanity-check on the expense half |
| Break-even occupancy | (OpEx + debt service) ÷ GSR | 91.0% | How much room before zero |
Five numbers, each with a benchmark beside it. That pairing matters more than the numbers: a metric without a comparison is trivia. See break-even occupancy for the one most people have never computed.
Where pro formas go wrong
| Error | Symptom | Fix |
|---|---|---|
| Vacancy deducted twice | Once as a line, and again inside a management fee taken on collected rent. | Pick one convention. DealQuanta takes percentage lines on gross scheduled rent throughout. |
| Mortgage inside operating expenses | Cap rate looks terrible; DSCR is nonsense. | Debt service lives on line 12 and nowhere else. |
| No CapEx reserve | Operating expenses land near 30% of rent. | Budget by component, then check against the 50% rule. |
| Appreciation inside cash flow | A cash-flow figure larger than the rent could support. | Keep it out entirely. It belongs in IRR, where it is visibly an assumption. |
| Year-one rent set to your target, not the lease | Income that does not match the rent roll. | Underwrite in-place rent; model the increase in year two with a turnover attached. |
Multi-year, and how far to take it
A single year is enough to decide most purchases. A multi-year projection earns its place when something is scheduled to change — a below-market lease rolling to market, a rate reset, a value-add plan, or a sale. Beyond about year three, growth assumptions dominate the output, so treat late years as a shape rather than a forecast.
If you do project forward, grow rent and expenses separately. Expenses have recently grown faster than rents in many markets, and a model where both grow at 3% quietly assumes that stops. Then finish with the honest step: stress-test it and record what breaks it.
You can build this entire structure in the free calculator — every line above is an input, and the metrics block updates live.
Frequently asked questions
What is a pro forma in real estate?
A structured projection of a property's income and expenses under stated assumptions, running from gross scheduled rent down to net operating income and then to cash flow after debt service. It describes what a property should earn, not what it is guaranteed to earn.
Does a pro forma include the mortgage?
Below the NOI line, yes — annual debt service is subtracted from NOI to give cash flow. It must never appear among the operating expenses, because NOI is defined before financing and putting the loan there breaks cap rate, DSCR and any comparison between properties.
How many years should a rental pro forma cover?
One year is enough for most buy decisions. Extend to five or ten when something changes over time — a below-market lease, a rate reset, a value-add plan or a planned sale — and treat years beyond the third as directional, since growth assumptions dominate them.
What is the difference between a pro forma and actuals?
Actuals are what the property has produced under the current owner; a pro forma is what it should produce under your assumptions and your cost structure. Sellers often present a pro forma as though it were actuals — ask for twelve months of real statements and the rent ledger before accepting either.