What is a Pro Forma in Real Estate? 10 Things (2024) You Must Know

A real estate pro forma is a report that gathers current or estimated income and expense data to project the net operating income and cash flow of a property.

It’s an important piece of the equation for real estate investors, but it can get confusing if you don’t understand what you’re looking at.

In this article, we’ll attempt to explain what a pro forma is as plainly as possible.

Keep reading to learn more!

1. What is a pro forma in real estate?

Pro forma is a Latin term meaning “for the sake of form.”

In the investing world, it describes a method of calculating financial results in order to analyze either current or projected figures.

A property’s pro forma is essentially its cash flow projections.

These projections determine the project’s anticipated monthly income as well as expenses, including taxes and expected ROI.

2. What should a pro forma include?

There are two important elements of a pro forma that you should consider.

Here’s a breakdown of each.


Since a pro forma is an analysis of future cash flows, you will have to make certain assumptions to help guide your analysis.

These assumptions include (but are not limited to):

  1. Expected rent per unit or per square foot
  2. Design assumptions (number of units or building square footage)
  3. Expense assumptions (management fees, insurance, taxes, miscellaneous fees, repair reserves)
  4. Financing assumptions
  5. Inflation
  6. Growth in building expenses over time
  7. Capital expenditures paid from reserves each month

bulletCash flow:

You will use all of your assumptions to make a projection about the project’s cash flow.

The analysis will look at gross revenue, total expenses and net operating income.

Usually, the pro forma will extend out to the year at which the investor or developer is expecting to sell the property or for the length of time that a loan will be held against the property.

3. Why is a real estate pro forma important?

A pro forma allows an investor, developer or lender to look at the net operating income (NOI) and cash flow projections from a real estate project to make investment calculations, including cap rate, cash-on-cash return, and ROI (return on investment).

These calculations allow the developer or investor to look at the project income to risk profile in order to determine if the project makes sense.

If you have a pro forma that reflects an inaccurate NOI and cash flow, it can seriously compromise your other financial metrics and lead to poor investment decisions.

4. When is a pro forma used in real estate?

Typically, a pro forma is used in commercial real estate when an investment property is being offered for sale.

A pro forma is also used when developers seek financing for a development project as it allows a lender to analyze whether it makes sense to lend to the project.

When a pro forma is used in the sale of commercial property, it is often utilized to determine a property’s cap rate in order to price the property correctly.

It may also be used to help prospective buyers determine a property’s potential return on investment.

If you’re selling your property using a commercial broker, the broker will analyze the property’s current performance and compare it to market standards.

Your broker will most likely list the property for sale based on the pro forma projections according to the going cap rate for the commercial real estate type in that market.

If you’re not selling your property with a broker, then an experienced real estate analyst or consultant should be able to help you put together a pro forma.

That said, the prospective buyer needs to be able to determine their own pro forma for the property.

It’s the buyer’s responsibility to verify that the property can perform according to the provider pro forma as the rental rates and expenses provided by the seller or broker may be inflated or deflated to boost the property’s projections.

This is worth keeping in mind as you look at the wisest investment to make.

5. How do you create a real estate pro forma?

Are you an investor looking to create your own real estate pro forma?

Here’s what you need.


1. Projected gross income – Total rental income that the property would generate if it was 100 percent leased at all times.

2. Vacancy allowance or loss – This is the rental income that is lost between tenant turns.

Buyers need to consider the length of their lease and the amount of time that the property may be vacant between tenants.

Additionally, after a tenant moves out, there will be a period of time where cleaning, painting, and repairs must take place before a new tenant can move in.

3. Other income – This is late fees, coin-operated laundry, etc.

4. Effective gross income – This is the total of the projected gross income plus other income minus the vacancy allowance.

bulletOperating expenses

1. Repairs – Expect to set aside money every month for repairs and maintenance (even if the property has been newly renovated).

Typically, putting away 5 percent of the rent every month will cover any necessary expenses.

However, if you’re purchasing an older property, buyers may want to consider more than 5 percent.

2. Property management – Often, this category is left off the pro forma sheet because buyers expect to manage the properties themselves.

Even if you’re planning to manage your own property, be sure to include this because you’ll want to compensate yourself for your time and related expenses.

If you don’t plan to take any compensation for managing the property, you want this included because the property’s financial merit is based on related expenses.

If you’re planning on hiring a property manager, the typical cost is between 8 and 10 percent of the monthly total rent.

3. Mortgage payment – If the property is leveraged, this includes monthly debt service (principal and interest payments).

4. Other expenses – This includes the recurring cost of taxes and insurance (if it’s not included in the mortgage payment) and one-time fees for leasing, legal, and marketing.

5. Total expenses – This is the total of repairs, property management fees, and all other expenses.

bulletNet operating income

1. Net operating income – This is sometimes called “before-tax cash flow,” and it is calculated by subtracting all operating expenses from effective gross income.

6. What’s an example?

Let’s take the above categories and put them into action to show you what a typical pro forma for a single-family rental property looks like using annualized income and expenses.

Some of the income and expense items are based on a percentage of gross income.


    1. Projected gross income = $12,000
    2. Vacancy loss at 5% (of gross income) = $600
    3. Effective gross income = $11,400


    1. Repairs at 5% (of gross income) = $600
    2. Property management at 8% (of gross income) = $960
    3. Other expenses = $2,400 (i.e. property taxes, insurance, leasing fee)
    4. Total expenses = $3,960

bulletNet operating income

    1. Net operating income = $7,440
    2. Mortgage expense = $5,112 (principal and interest only)
    3. Before tax cash flow = $2,328

This is just one year of projected cash flow.

However, the pro forma will also make projections about later years based on assumptions around revenue and expense growth (see below).

See footnote 1

Looking for more examples?

We’ve included other examples in this article.

Keep reading to see more!

7. What’s the difference between actual and pro forma?

A pro forma statement describes how a property could, should, or would be performing based on certain assumptions or “what if” scenarios.

The “actual” reports the real financial performance of a rental property.

8. What four things should you watch out for?

Are you worried that you may be looking at a misleading pro forma?

Chances are if the pro forma seems too good to be true then it probably is.

Here are four things you should watch out for in a real estate pro forma.

bulletUnderstated vacancy rate:

Instead of calculating the vacancy rate based on a percentage of gross income, research the market to determine what the true vacancy rate is in your area.


Often, multi-year pro formas will assume that rental income will consistently rise at the rate of inflation (if not more).

However, this may not be the case in a competitive market.

bulletMissing expenses:

Rental taxes, HOA fees, common area maintenance and utility expenses, and insurance are often omitted from pro formas, and this creates an unrealistically high cash flow.

bulletOverly simplified lump-sum expenses:

Instead of expressing each expense as a dollar amount, some pro formas lump all expenses into one line item.

This understates the true cost of the operating expenses.

9. How do you recognize and avoid misleading pro formas in real estate?

It’s common to see a different version of pro formas from real estate agents, brokers, and sellers.

These will range from complex and confusing to overly simple.

Be cautious when analyzing a seller’s pro forma because it could be misleading.

It’s better practice to find a pro forma that fits your needs and use that (instead of the seller’s).

An example of an overly simplistic pro forma is one featured on a turn-key property provider’s website we came across.

It included the purchase price, gross annual rent, cash flow per month, and appreciation.

However, this particular pro forma assumed that there would be no expenses whatsoever, which is impossible.

It also included appreciation in the cash flow return, which no one is capable of predicting and should not be considered as part of the cash flow.

On the opposite end of the spectrum is a pro forma that may be too confusing and complex for your purposes.

Sometimes pro formas will include line items like monthly taxes, insurance/HOA, maintenance expenses (3 percent), vacancy rate, monthly net cash flow, yearly net cash flow, principal reduction, cumulative cash return, etc.

Such complexity may be required by a lender, but other times it’s completely unnecessary.

So, why do misleading pro formas exist in real estate?

Sometimes, sellers add unnecessary items to their pro forma to either confuse buyers or make their investment property look more profitable than it actually is.

10. What does a pro forma look like for a development project.

Let’s look at an example for a hypothetical residential subdivision.

Project Revenues
Number of Units50
Average Sale Per Unit$400,000
Gross Sales$20,000,000
Less Commissions, Fees-$800,000
Net Project Revenues$19,200,000
Project Costs
Land Acquisition$2,575,000
Planning, Design & Approvals$600,000
Site & Building Construction$12,175,000
Amenities, Off-Site Costs$100,000
Management & Overhead$1,760,500
Total Project Costs $17,210,500
Net Cash Flow Before Financing$1,989,500
Financing Interest$1,102,400
Net Cash Flow to Developer$887,100
Cash Investment$1,020,600
Total Cash-on-Cash Return86.9%
Annualized Cash-on-Cash Return19.9%
Internal Rate of Return 22.4%

To understand what revenues will be generated, a developer will have to perform a market analysis that recommends appropriate rents, charges, or sales values.

This is where the developer’s experience will come in.

They’ll draw on knowledge of market rent or what comparable projects obtained in sales.

They may end up answering this question with a highly detailed market study or by penciling in the values that are being used at another nearby project.

In the above example, the two main revenue assumptions that the developer will need to compute include:

bulletGross sales:

In our imaginary 50-unit housing subdivision, each of the houses will sell for a different price depending on their size and features.

In this scenario, the homes could be expected to command base prices at around $400,000.

In a more detailed analysis, the developer would add in estimates and an allowance for premiums on choice lots, customer-selected options, and upgrades to come up with the final gross sales projection.

bulletLess commissions and fees:

The gross sales revenue can be reduced by the cost of selling the homes.

Sales commissions will need to be paid to sales agents who may be part of a real estate agency contracted to market the project, or in-house sales staff, or independent realtors to the project.

Legal fees, closing costs, and other “transactional” costs should also be deducted from gross revenues.

In this example, these fees are assumed to amount to $800,000, which leaves the Net Project Revenues at $19.2 million.

You just have to subtract the Less Commissions and Fees from the Gross Sales to arrive at this number.

Take a look at the figure above for more information.

Final thoughts

A pro forma is one of the most essential documents in a real estate investment.

Prior to committing funds to a deal, you should carefully survey this document and ensure its accuracy.

Often, a pro forma can be misleading, so read the fine print to determine whether or not key assumptions are both reasonable and supported by data.

When you’re looking at making a real estate purchase, always calculate your own pro forma.

It’s helpful to prospective buyers as they identify the potential growth of a property.

That said, you should always view it as an estimate rather than a reflection of the actual cash flow or real growth that a property will have.

The market is unpredictable, and projections can be dramatically off.

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Erika Gokce Capital

Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.

  1. https://www.mergersandinquisitions.com/real-estate-pro-forma/

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