A rental property pro forma is a comprehensive document that projects the income and expenses of a particular property. It typically offers the prospective buyer a crystal-clear picture of their potential returns.

Unlike actual financial statements, which record past transactions, a pro forma is forward-looking. It’s a blueprint, a hypothetical scenario based on a few well-informed assumptions about how a property may perform financially.

Understanding and creating a robust pro forma can significantly impact your expectations and ultimately, your investment decisions.

Sellers often use pro formas to present their properties in the best light, highlighting potential for growth and profitability that may not be reflected in past or current financials. Buyers benefit by making their own assumptions and peering into the future to see the viability of an investment before committing hard-earned money.

To help save you time when creating one for yourself, we provide a free pro forma template below. We also break down its components, analyze a buyer’s and seller’s perspectives of the document, and share pitfalls to avoid.

Key components of a pro forma template

The following pro forma components are some of the key pieces you’ll want to use to paint a realistic picture of a property’s financial potential. This in turn creates a foundation for making informed investment decisions. Here’s a closer look at each section… 

Revenue sources

When detailing revenue sources, a pro forma’s primary focus is the property’s rental income. However, it’s crucial not to overlook additional revenue streams that can boost your bottom line, including:

• Late fees
• Parking and storage fees
• Charges for lost or replacement keys
• Income from appliance or furniture rental
• Laundry facilities in a multifamily unit
• Roommate fees and rent
• Pet fees and rent

Accurately projecting these figures requires market research and an analysis of comparable properties to help ensure your estimates are realistic and competitive. Consider using tools like the Zillow Rent Estimate Calculator, Rentometer, or Stessa’s Rent Estimate reports.

Operating expenses

This category includes all costs necessary to maintain and manage your investment, such as:

• Property management fees (which can vary depending on the level of service provided)
• Leasing fees paid to a real estate agent or property manager
• Maintenance and repair costs
• Property taxes
• Landlord insurance premiums
• Utilities not covered by tenants
• Landscaping
• HOA fees
• Professional fees like legal and accounting

Accounting for vacancy rates is also wise, meaning you should estimate how long and how often the property might sit empty between tenants.

Financing details

For many investors, purchasing a rental property involves securing financing. In your pro forma, detail these expenses, including:

• Loan amount
• Interest rate
• Term length
• Down payment
• Closing costs
• Any required escrow payments

These factors influence your monthly mortgage payments and the net cash flow generated by the property.

Capital expenditure (CapEx) forecasts

Capital expenditures include major repairs or improvements that increase the property’s value and/or extend its life, such as:

• Roof replacement
• HVAC updates
• Kitchen remodels
• Funds used to make a property rent-ready at the time of purchase

Unlike routine maintenance expenses, CapEx investments are not made annually. They’re used for long-term property value preservation and growth. However, consider setting aside a portion of your rental income in a reserve account each month to ensure the money is available when and if you need it.

Accurately forecasting these expenses in your pro forma helps ensure you’re prepared for significant future outlays, preventing an unexpected impact on your cash flow or paying out of pocket from personal funds.

A free pro forma template for rental properties

To help streamline your investment analysis, use our free rental property pro forma template. Incorporating the key components into this template—revenue sources, operating expenses, financing details, and CapEx forecasts—helps you create a detailed financial overview of your rental properties.

To download the template in your preferred format, click either link below. Whether you’re analyzing a new investment opportunity or assessing the ongoing performance of current properties, this template can become a vital part of your real estate investment toolkit.

Download the complete rental property pro forma template in Excel here.

Download the complete rental property pro forma template in Google Sheets here.

Already managing a portfolio of properties and want to keep an eye on performance? Stessa offers a popular solution.

Stessa simplifies how you manage rental property operations and finances. You can access round-the-clock insights into your investments and create comprehensive income statements, balance sheets, and detailed cash flow reports. Plus, the platform handles tasks like rent collection and tenant screening with ease.

With Stessa, investors avoid having to deal with manual data inputs and outdated information. Discover how Stessa can transform your investment strategy and management operations today.

The best part? You can get started for free.

How to use a rental property pro forma

A well-crafted pro forma is more than mere numbers; it offers a narrative of what a property may be able to achieve over time.

For buyers, a pro forma is a lens through which they can assess an investment’s potential returns and valuation. Sellers use it to outline their property’s strengths and future financial prospects, in the hopes of making the opportunity more attractive to interested investors.

A buyer’s pro forma: Strategic evaluation for long-term growth

When buyers analyze a rental property through a pro forma, their goal is typically to unearth opportunities and risks that aren’t immediately apparent. Here are a few key factors to evaluate in a pro forma if you’re a potential buyer:

• Market rent vs. operational efficiency: Along with projecting rental income, assess how the property’s unique features or location contribute to achieving or surpassing market rent while maintaining operational efficiency. Evaluate how minor upgrades or changes in management could significantly enhance the net operating income (NOI).
• Dynamic financing scenarios: Go beyond static financing details to model different scenarios, including down payment amounts, interest rates, and the impact on cash flow. Consider the effects of refinancing options down the line, especially if the initial terms are adjustable or if market conditions change.
• Growth potential analysis: Use the pro forma to simulate various market conditions, such as property tax rate changes or insurance costs, and their impact on the property’s long-term valuation. This helps identify the property’s immediate and sustained ROI, factoring in market volatility.

A seller’s pro forma: Demonstrating unique value and future upside

Sellers can use the pro forma to highlight aspects of the property that might be overlooked or undervalued. Here are a few ways to create a compelling story for interested buyers:

• Customize to highlight strengths: Tailor the pro forma to showcase the property’s unique strengths, such as energy-efficient installations that can reduce long-term operating costs or zoning advantages that may allow for future expansion or alternative use.
• Scenario planning: Provide prospective buyers with a scenario-based pro forma that illustrates the financial outcomes of different strategies, like possibly transitioning from long-term to short-term rentals or the impact of proposed local developments on property values.
• Highlight economic moats: Utilize the pro forma to discuss non-financial factors that serve as economic moats, such as major employers, emerging technology hubs, or nearby infrastructure projects that could enhance accessibility and desirability, increasing the property’s competitive edge in the rental market.

Metrics to measure investment performance

A well-prepared rental property pro forma can offer a detailed view of specific metrics, which help evaluate the health and potential of your investment. Here are some key financial benchmarks to include. 

Cash flow analysis

A cash flow analysis measures the net amount of cash transferred into and out of a property investment over a certain period. It’s essential for understanding your investment’s liquidity and immediate financial health.

Example

Suppose your rental generates $2,000 in rent monthly, and your total monthly expenses (including mortgage, taxes, insurance, and maintenance) are $1,500. Your monthly cash flow would be $500.

Net operating income (NOI)

NOI is a property’s total income minus its total operating expenses, excluding financing costs. This figure helps evaluate the property’s intrinsic income-generating capabilities, independent of how it’s financed, providing a pure look at its operational effectiveness.

Example

If your rental brings in $24,000 annually in rent and incurs $8,000 in annual operating expenses, the NOI would be $16,000. 

Capitalization rate (Cap rate)

The cap rate offers a snapshot of a property’s yield within a specific time frame, calculated by dividing the NOI by the property’s current market value. It’s instrumental in comparing the relative value of similar properties in the same market and understanding market trends.

Example

For a rental valued at $300,000 with an NOI of $16,000, the cap rate would be approximately 5.33% ($16,000/$300,000). A higher cap rate may indicate a higher return but may also come with higher risk. A lower cap rate suggests a potentially safer investment in a more mature market that may sometimes offer greater upside on appreciation.

Return on investment (ROI)

ROI measures the overall profitability of an investment, calculated by dividing the net profit of the investment by the initial cost. It provides a high-level view of the investment’s performance over time.

Example

Assume you bought a rental for $250,000 and, after a few years of operation and appreciation, sold it for $350,000. After subtracting all costs (e.g., closing fees and a real estate commission), your net profit is $80,000. The ROI would be 32% ($80,000/$250,000), illustrating the investment’s growth in value beyond its basic cash flow.

Cash-on-cash return

This metric calculates the cash income earned on the cash invested in a property, offering a clear picture of the investment’s net cash yield based on the actual cash outlay. It’s useful for evaluating the effectiveness of your cash investment in generating income from rental real estate versus alternative investments.

Example

Say you made a down payment of $50,000 on a rental property, your annual cash flow after all expenses (opex + capex) was $6,000 in the first year. Your cash-on-cash return would be 12% ($6,000/$50,000) for the year. 

Common pitfalls to avoid

You can ensure a more reliable analysis of your rental property by avoiding these common mistakes:

• Overestimating rental income and rent increases: Assuming you’ll rent your property consistently at top dollar and your rent will continually rise is tempting but overlooks market fluctuations, potential vacancies, and periods when rent increases may not be feasible due to economic conditions or local rent control laws. Use sound estimates based on current and realistic market data to avoid overly optimistic projections.
• Underestimating expenses and the effect of inflation: Operational and maintenance costs can often be higher than you planned. Additionally, inflation can significantly increase these expenses over time. Failing to account for regular maintenance, capital expenditures, and inflation may result in underestimating ongoing costs, affecting the long-term profitability of the investment.
• Ignoring market dynamics and trends: Real estate markets are influenced by macroeconomic factors and local trends, including job growth, population shifts, and industry expansions or contractions. Ignoring these can lead to inaccurate future property value assessments and rental demand. Including a sensitivity analysis in your pro forma can help account for various market scenarios.
• Property-specific risks: Every property comes with unique risks, such as tenant turnover, unexpected major repairs, or changes in neighborhood desirability. For instance, high tenant turnover can increase vacancy rates and maintenance costs, impacting your bottom line. Assessing these risks upfront can help mitigate surprises down the road.
• Failing to plan for vacancies: Thinking you’ll have 100% occupancy year-round is unrealistic. Vacancies can occur for various reasons like market downturns, seasonal fluctuations, or the time needed for repairs and finding new tenants. Not accounting for these vacancy periods can inflate expected income and distort investment performance metrics.
• Neglecting cash reserves: Many investors neglect setting aside enough cash reserves for emergencies or unforeseen expenses. Without this safety net, one significant repair or a few months of vacancy can put undue financial strain on the investment, potentially forcing a sale at an inopportune time.