What a proforma is (and isn't)
A proforma (from Latin: "as a matter of form") is a projected income statement for a rental property, showing what you expect to earn and spend over a holding period. It starts with market rents and works down to net cash flow — giving you the inputs for a cash-on-cash return, cap rate, or IRR analysis.
What a proforma is not: a guarantee. Sellers and brokers routinely present proformas with optimistic assumptions — low vacancy, below-market expenses, unrealistic rent growth. Your job as a buyer is to build your own conservative proforma and test the deal against realistic numbers, not take the seller's projections at face value.
The seven lines of a rental proforma
1. Gross Potential Rent (GPR): What you would collect if the property were 100% occupied at market rent for a full year. Start here with current market data, not wishful thinking.
2. Vacancy and Credit Loss: Subtract a realistic vacancy estimate — typically 5–10% for stabilized residential rentals in most markets, 10–15% for commercial or value-add deals. This gives you Effective Gross Income (EGI).
3. Other Income: Add income from laundry, parking, late fees, pet fees, or storage. Keep this conservative.
4. Operating Expenses (OpEx): The major line items are property taxes, insurance, maintenance and repairs, property management (8–12% of EGI), utilities (landlord-paid), HOA fees, and capital expenditure reserves (5–10% of EGI). A common shorthand is the 50% rule — half of EGI goes to expenses.
5. Net Operating Income (NOI): EGI minus all operating expenses. NOI is the unleveraged income of the property — it's what the cap rate is calculated on.
6. Debt Service: Annual principal and interest on your mortgage. This is based on your loan terms, not a property characteristic.
7. Cash Flow: NOI minus debt service. Divide by your total cash invested for the cash-on-cash return.
Common proforma mistakes to avoid
Using scheduled rent instead of market rent creates optimistic projections if current tenants are below market. Assuming zero vacancy is unrealistic — every property has turnover. Using actual maintenance costs from a great recent year instead of long-run averages understates expenses. Omitting CapEx reserves is the most common error: roof, HVAC, appliances all wear out. Build in reserves even if you don't spend them every year.
Model at least three scenarios: base case (realistic), bear case (10% below market rent, higher vacancy), and stress test (vacancy plus a major repair). If the deal works in the bear case, you have real margin of safety.
Frequently asked questions
What is a good NOI margin for a rental?
After operating expenses, a healthy rental might show NOI at 45–60% of Gross Potential Rent, depending on the market and property type.
How far out should a rental proforma project?
For a simple purchase analysis, a 5-year proforma is standard. For value-add or development projects, 10 years is common to capture the hold and exit.
What is the difference between proforma NOI and actual NOI?
Proforma NOI is projected (before you own the property). Actual NOI is what the property delivered historically, from rent rolls and bank statements.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.