ANALYSIS

What Is a Proforma and Why Every Investor Needs One

Updated March 2026

A Proforma Is Your Crystal Ball

A proforma is a forward-looking financial projection for a rental property. It estimates income, expenses, cash flow, and returns over a holding period (usually 5-10 years). Every serious investor builds one before making an offer. It's not a guarantee — it's a structured way of asking 'what if?' with real numbers instead of vibes.

What Goes Into It

Year 1: current rent, actual vacancy rate, itemized operating expenses (taxes, insurance, maintenance, management, reserves), mortgage payment, and resulting cash flow. Years 2-10: project rent growth (2-4% annually is typical), expense growth (3-5% — expenses usually grow faster than rent), property value appreciation, and mortgage balance reduction. The output: annual cash flow, cash-on-cash return, total ROI, and projected equity at sale.

The Seller's Proforma Is Lying

When a seller or listing agent gives you a proforma, it usually shows 0% vacancy, below-market expenses, above-market rent growth, and zero capital expenditures. It's a marketing document, not analysis. Build your own with conservative assumptions: 7-8% vacancy, 10% maintenance, 8% management, 5% capex reserves. If the deal still works with your numbers, the seller's optimism is just gravy.

Run Three Scenarios

Best case (rents grow 4%, zero major repairs, full occupancy). Base case (rents grow 2%, one month vacancy per year, normal maintenance). Worst case (rents flat, two months vacancy, one major repair). If the deal survives the worst case without you losing sleep, it's a buy. If the worst case has you writing checks every month, the deal is too thin.