What's the difference between pro forma and actual?

Pro forma is what the seller projects the property will do AFTER you take it over. Actual is what the property has historically done. Pro formas typically assume higher rents, lower vacancy, lower expenses, and zero capex — the optimistic version of operations. Actuals reflect the real numbers, which are almost always less rosy. ALWAYS ask for actuals (T-12: trailing 12-month income/expense statement) and underwrite based on those, not on the pro forma.

Why are pro formas always optimistic?

Three reasons. (1) The seller's incentive is to make the property look good — pro formas are marketing documents. (2) Sellers often assume the buyer can raise rents to 'market' immediately; in practice that takes 1-3 years of turnover. (3) Sellers leave out capex reserves because the IRS doesn't require them on operating statements, and including them lowers the apparent cap rate. The pro forma 'cap rate' is almost always 1-3 percentage points higher than what you'd actually achieve.

What's a T-12 and why does it matter?

T-12 = trailing twelve months of actual income and expenses. It's the most important document in commercial real estate underwriting (5+ unit properties). For SFR purchases, ask for at least the last 12 months of bank statements showing actual rent collected and the actual property tax bill. The T-12 cuts through pro forma optimism and shows you what the property actually produces. If the seller won't provide it, that's a red flag.

Can I trust a pro forma's vacancy assumption?

Rarely. Most pro formas assume 3-5% vacancy. Real vacancy in most markets runs 6-10%. A single 30-day turnover = 8.3% vacancy for that year. Adjust upward — use 7-8% for B-class, 9-11% for C-class, 5-6% only for very stable A-class properties with long-term tenants. The pro forma's vacancy line is often the single biggest source of inflated cap rate.

What expenses does the pro forma typically understate?

Seven big ones: (1) maintenance (often shown at 4-5%, real is 6-10% for newer / 10-15% for older). (2) capex reserves (often $0, real is $50-200/mo per unit). (3) vacancy (3-5% pro forma, 6-10% real). (4) management (sometimes shown at $0 for 'self-managed,' but you should budget 8-10% even if you self-manage). (5) insurance (often shown at last year's rate, not current quote). (6) utilities (sometimes shown net of tenant reimbursements that don't actually happen). (7) legal/bad-debt (rarely shown at all; budget 1-2% of gross rent).

How to read a rental property pro forma (and the 7 lies inside most of them)

What a pro forma actually is

A pro forma is a one-page (sometimes multi-page) projection of expected income and expenses for a rental property. Sellers use them to justify asking price by showing a strong projected cap rate. They're marketing documents, not financial statements.

The lines are standard: gross rent, vacancy, operating expenses (broken into categories), net operating income (NOI), and the implied cap rate at asking price.

Your job as a buyer: translate the pro forma into reality, which usually means lowering rent assumptions, raising expense assumptions, adding line items the seller skipped, and recomputing the cap rate.

Lie #1: Pro forma rent is "market rent," not current rent

Many pro formas show "projected market rent" — what the seller thinks units could rent for after you raise them. Current actuals are often $200-400/mo less per unit.

The translation: ask for the actual rent roll. Compare unit-by-unit to pro forma. If current rents are below pro forma, factor in 1-3 years of turnover before you reach pro forma rents — which means lower year-1 and year-2 cash flow than the pro forma shows.

Lie #2: Vacancy at 3-5% (real is 6-10%)

Most pro formas use 3-5% vacancy. In reality, a single 30-day turnover = 8.3% vacancy for that year. Two turnovers per year on a 4-unit property = 4-8% blended.

The translation: use 6-8% for B-class, 9-12% for C-class properties. Only use 5% if you have multiple years of actuals showing it.

Lie #3: Insurance at last year's rate

The seller's pro forma insurance number is from their last bill. In hardening markets (FL, LA, TX coastal, CA fire zones), your new-buyer quote can be 40-80% higher than the seller's current premium.

The translation:ALWAYS quote insurance yourself before closing. Use the higher of (a) your fresh quote and (b) the seller's number times 1.20.

Lie #4: Property tax at current assessment (post-sale reassessment coming)

Many states reassess property tax based on sale price. Some counties have caps; others don't. If the seller bought 10 years ago and the property tax has been frozen, your post-sale tax bill might be 30-100% higher than the pro forma.

The translation:ask your local title rep what the post-sale tax bill will be. Or check the county assessor's rules. Use the post-sale number in your underwriting.

Lie #5: Zero capex reserve

Pro formas almost never include capex reserves — the savings you set aside each month for big-ticket replacements like roof, HVAC, and water heaters. This makes NOI (and therefore cap rate) look better than it actually is.

The translation: add 5-10% of gross rent as capex reserve. For older properties (40+ years), use 8-12%. The cap rate drops accordingly — typically by 1-2 percentage points.

Lie #6: Maintenance at 5% (real is 8-15%)

Maintenance differs from capex — these are the smaller, more frequent fixes (HVAC service, plumbing calls, appliance repairs, paint touch-ups, landscaping). Pro formas often show 3-5%; real numbers run 8-15% depending on age and class.

The translation: 6-8% of rent for newer (post-2000) properties. 10-15% for pre-1980. Older Philadelphia rowhouses or Cleveland pre-WW2 stock can hit 15-20% in capex-heavy years.

Lie #7: Management at $0 (because the owner self-manages)

Sellers who self-manage often show $0 management on the pro forma. This makes NOI look ~10% higher than it would be for a buyer who hires a property manager.

The translation: always model 8-10% management, even if you plan to self-manage. Why? Your time has cost. AND if you ever sell or hand off the property, the next owner will need PM. A deal that only works at 0% management is a fragile deal.

Lie #8 (bonus): Legal + bad debt at $0

Pro formas rarely include legal expenses (eviction processing, lease enforcement, attorney consultations) or bad debt (rent that's owed but never collected). Both are real costs.

The translation: budget 1-2% of gross rent for combined legal + bad debt. Lower in landlord-friendly states (TX, FL, GA) with fast eviction processes; higher in tenant-leaning states (NY, NJ, CA, IL) where evictions take 60-180 days.

The real-cap-rate worksheet

Take the seller's pro forma. For each line, apply the translation above:

Rent: use current rent (from rent roll), not projected market rent
Vacancy: use 7-8% B-class / 10-12% C-class
Insurance: use fresh quote in your name
Property tax: use post-sale reassessment estimate
Maintenance: 8-12% of rent depending on age
Capex reserve: 5-10% of rent (higher for older properties)
Management: 8-10% even if you self-manage
Legal / bad debt: 1-2% of gross rent

Recompute NOI. Divide by asking price. You now have the realistic cap rate.

In my experience, the realistic cap rate runs 1.5-3 percentage points BELOW the pro forma cap rate on most deals. An 8.5% pro forma cap often translates to a real 6-7% — still good in many markets, just not 8.5%.

When to walk based on the gap

If the real cap is within 1 point of the pro forma cap, you're looking at an honest pro forma. Worth pursuing.

If the gap is 1-2 points, normal optimism. Negotiate price down 5-8% to make the math work for you.

If the gap is 2+ points, the seller either doesn't understand their own property or is actively misleading buyers. Walk OR negotiate hard.

The TrueCap shortcut

You don't have to do this translation by hand on every deal. TrueCaptakes the listing data, applies realistic expense assumptions for your property's age and market, and shows you the real cap rate next to the pro forma cap rate in 60 seconds. The number it shows is what you'd actually achieve — not what the seller wants you to believe.

For a refresher on the underlying math, see our 60-second underwriting framework.