By Jeff Rohde
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.
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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.
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Provided by Rental Housing Journal
Here is a look at 4 kinds of front doors you can choose for your rental property when you are making repairs or replacing and the pros and cons of each.
The look, feel and features of a rental property’s front door are more important to tenants than landlords and property managers might think.
The front door is one of those subtle elements that can actually make a big difference to the overall feel of a property. Experts point out that a property’s front door can actually be responsible for significant fluctuations in the value of the property.
Potential tenants will likely take notice of a damaged, flimsy or older-looking entryways. They could interpret this as a sign of lack of upkeep for the property or concern for the well-being of tenants.
Additionally, a damaged front door can make it easy for burglars to identify a certain property as one that they could successfully break into.
Pros and cons of front door material for your rental property
Purchasing a brand-new front door is not a routine expense. So, if you are thinking of replacing old doors or upgrading doors on your property, here are some front door materials to consider:
Pros and cons of wooden front doors
1. Ultra-customizable – wooden doors can be tailored to match countless designs, shapes and color schemes, while also being able to house additional decorative elements, such as glass mosaics and panels
2. Flexible price points – the unique natural look of wood can be accessible for most budgets as different varieties of woods are available at a variety of price points
3. Unique look – Many property owners and designers find wood to be worth the investment as it presents a naturally variegated and “high-end” refined look that other man-made materials cannot replicate
Cons:
1. Weather-sensitive – wood is a material that is prone to be affected by its exposure to the weather and other environmental elements. Direct sunlight can fade the natural coloring of the wood, and high-moisture levels in the air (or from precipitation alone) can lead to warping and even rotting of the wood
2. High-maintenance – to ensure that the wood ages well and without being damaged by the natural elements discussed above, it’s essential to regularly treat the wood. Tinctures and sealants should be regularly applied by a reliable maintenance professional, which will be an added maintenance cost to consider.
3. High-price for top-quality – some wood varieties are naturally more resistant and sophisticated-looking, which contributes to their one-of-a-kind appeal and/or ability to last through the years without needing major attention. Premium varieties, such as mahogany or cedar, will be considerably pricier.
Pros and cons of steel front doors
1. Super safe – when it comes to property intrusions, reinforced steel doors are known to be safest against breaches, allowing for increased confidence in a property’s overall defenses against unwanted visitors.
2. Affordable but effective – when considering its wood and fiberglass counterparts, steel stands out as being far more affordable, while still offering the safety element that it shares with fiberglass and being much more low-maintenance than wood and its issues with exposure and aging.
Cons:
1. Insulation is not its forte – steel is a known conductor of heat and electricity, which makes it problematic when it comes to wanting to keep a property’s interior temperature at a set level. Steel will contribute to heating up the space when heated by outside temperatures and/or sunlight and will struggle to keep the cold out during the winter months. Insulating layers and treatments can improve this downside, but they will come at an added cost.
2. Denting – steel can easily become dented or chipped following impact, and this often results in unappealing marks that are difficult to completely erase. To effectively get right of the unappealing look of those visible surface damages, an entirely new door might need to be purchased.
3. Rusting – while steel is not as sensitive to moisture as wood, it can easily rust over time as it is exposed to moisture and precipitation. Our experts encourage consulting the manufacturer to understand whether and how professional treatments can help with rustproofing.
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Pros and cons of glass front doors
1. Unique look – solid glass doors can be made to match a great variety of preferred styles, with varying cuts, shapes and opacity available to be reproduced as desired.
2. Luminosity – glass allows natural light to enter the home like no other material can, which some property owners find to be a valuable addition to the look and feel of their property.
Cons:
1. Fragility – experts agree that glass is naturally delicate even when it is reinforced, making it essential to be mindful of potential scratches, cracks and chipping that could easily occur.
2. Privacy – while some might be excited about the way glass allows for natural light to illuminate the home, some can be put off by the way glass makes it easy for passerby’s to peek inside a property
3. Questionable safety factor – glass door made for the purpose of being utilized as a property’s front door are generally reinforced to make it difficult for intruders to gain access by easily shattering the glass surface. This being said, glass remains rather fragile and much easier to break than wood, steel, and fiberglass combined.
Pros and cons of fiberglass front doors for your rental
1. Versatile – fiberglass paneling is man-made, which allows for creating a variety of unique textures and styles. Fiberglass doors can be made to resemble a natural wood grain, or also present smooth and glossy or matte and satin surfaces for distinguished coloring that can match a variety of architectural elements.
2. Resistant – many property owners choose fiberglass front doors as opposed to wood because they are not vulnerable to discoloration and damage from exposure, while still closely resembling the look of wood. They are also more resistant to wear and tear than their steel counterpart.
3. Low-maintenance – these doors should be maintained occasionally as they age, but they do not require sealants to be regularly applied, which does help with saving considerable amounts when it comes to maintenance expenses.
4. Secure – our experts confirm that fiberglass doors are just as secure as their steel counterpart, which allows them to stand strong and dent-free following forced impact
5. Efficient – while all door types can be treated to add insulating properties, fiberglass vastly surpasses wooden and steel door when it comes to insulation. While steel will always struggle with efficiently insulating and wood is vulnerable to temperature and humidity changes, fiberglass is not affected by any of these issues. Having optimal insulation can help ensure lower energy use and expenses as it allows for a property to easily remain hot or cool temperatures as desired.
6. Affordable – while aesthetic additions – such as integrated wood or glass decors – will rise costs, basic fiberglass door models are generally rather affordable.
Cons:
Pricey add-ons – fiberglass doors are fairly affordable. But can get expensive as they are further customized with the addition of decorative elements or coats.
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Source: Disrupt Equity
In the complex world of investment opportunities, the multifamily real estate sector is poised for success in 2024. With its multifaceted capacity to deliver stability, growth, and tax benefits, residential properties that serve multiple inhabitants are more than a physical asset – they’re a versatile financial instrument. Here, we explore why those with a financial eye to the future should consider multifamily real estate as a linchpin in their investment portfolio.
Maximizing Benefits Through Leveraging Debt
Multifamily properties offer several strategic advantages that single-family homes simply cannot match. The first and arguably most significant is debt leverage. With a single down payment, an investor can control a much larger asset through a loan, magnifying the potential return on investment.
Furthermore, fixed rate debt offers a hedge against future interest increases, a particularly compelling feature amidst the whispers of economic policy shifts. Coupled with the fact that tenants often cover the costs of this debt through rent, the investor enjoys not only a stronghold against inflation but immediate cash flow as well.
In the race for financial independence, few things are as satisfying as an asset that generates its own passive income to pay down the mortgage. For multifamily properties, this is a given, positioning the investor favorably when it comes to long-term wealth accumulation.
Cash Flow in Multifamily Investments
An often underappreciated yet vital aspect of multifamily real estate investments is the potential for substantial cash flow. Over time, as the principal is paid down and property values, ideally, appreciate, the monthly income generated from tenants begins to exceed the expenses associated with property management, maintenance, and mortgage payments. This surplus is what investors refer to as cash flow – the real-time return on investment that lands in your pocket each month.
For those investors committed to the long haul, this shift towards positive cash flow is a significant milestone. It represents not only a return on investment but also an increase in the asset’s equity. The longer you are in the deal, the greater the potential for cash flow becomes. This growing income stream can provide financial stability and the flexibility to reinvest in additional properties, pay down existing debts faster, or fund personal endeavors. In essence, enduring the initial years where cash flow might be leaner can set the stage for a potential windfall of passive income, underscoring the value of patience and strategic foresight in multifamily real estate investing.
The Phasing out of Bonus Depreciation
Bonus Depreciation offers specific advantages, particularly to multifamily investors, who stand to gain significantly. A key component of multifamily investment is depreciation, a method allowing the gradual tax deduction for real estate depreciation. There are several reasons to invest in 2024, the main reason being that Bonus Depreciation is being phased out.
- Current Legal Provisions: The existing IRS tax code permits investors to utilize 60% bonus depreciation for certain qualifying improvements. In 2025 that drops to 40% and will be completely phased out by 2027.
- Future Policy Adjustments: The availability of these deductions is anticipated to decrease in the forthcoming year, underscoring the urgency for investors to engage with the multifamily market promptly to capitalize on these benefits.
- Enhanced Fiscal Benefits: When these tax incentives are combined with other financial advantages inherent to multifamily investments, such as mortgage interest deductions and business expense deductions, the tax efficiency of the multifamily sector becomes particularly evident.
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Rental Rates and the Inflation
Given the Federal Reserve’s considerable expansion of the money supply, 2024 is a year characterized by inflation. In such a climate, investors in multifamily properties stand to gain a strategic advantage.
Rent growth over time plays a crucial role in countering the effects of inflation for multifamily property investors. As rental rates increase, investors can more effectively manage and offset the cost increases in property maintenance and operations, thereby preserving the profitability and value of their investments in an inflationary environment.
Investors in multifamily properties are well-placed to navigate inflationary pressures. Rents typically rise with inflation, and the value of the underlying assets, such as apartments and buildings, also appreciates. This combination effectively enhances the investor’s financial portfolio.
Riding the Wave of Changing Lifestyles
The allure of a single-family home is losing its luster for a segment of the population increasingly drawn to the convenience and cost-sharing ethos of multifamily living. Changing demographic landscapes, lifestyle priorities, and an evolving workforce mean opportunities abound in this sector.
Millennials and Gen Z, in particular, are reshaping the real estate landscape. Their preference for urban living and the flexible demands of the modern workplace have turbocharged the multifamily market, and this trend shows no sign of abating.
Capitalize Now to Secure Your Future
Investing in multifamily real estate is not just about securing a property; it’s about securing your financial future. With debt leverage, tax benefits, and inflation-resistant income, the multifamily asset class is a testament to capital preservation and growth.
In conclusion, multifamily real estate should be on your radar for those looking to build a diverse and resilient investment portfolio. The nuances of 2024 present a unique confluence of factors that make this sector particularly attractive for immediate investment.
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