Vetting sponsors and deals
How to Analyze a Real Estate Pro Forma: Assumptions to Check
Benchmarks to check
- Apartment rent growth
- +0.9% a year (3Q 2026)
- Apartment occupancy
- 95.4% (3Q 2026)
- Freddie Mac vacancy floor
- 5%
- Apartment cap rate
- 5.79% (2Q 2026)
- Opex per unit, 2025
- $8,213 a year (NAA)
- SOFR
- 3.88% (Oct 20, 2026)
RealPage, Freddie Mac, NAA and FRED. Checked Oct 21, 2026.
The short answer
To analyze a real estate pro forma, rebuild it line by line and test each assumption against a dated outside source. Start with rent growth, vacancy, expenses, reserves, the loan and the exit cap rate. Then change one input at a time and see how far the equity multiple and IRR fall.
Benchmarks to check
- Apartment rent growth
- +0.9% a year (3Q 2026)
- Apartment occupancy
- 95.4% (3Q 2026)
- Freddie Mac vacancy floor
- 5%
- Apartment cap rate
- 5.79% (2Q 2026)
- Opex per unit, 2025
- $8,213 a year (NAA)
- SOFR
- 3.88% (Oct 20, 2026)
RealPage, Freddie Mac, NAA and FRED. Checked Oct 21, 2026.
- Every line is an assumption. A pro forma is the sponsor's forecast, so check each input against a dated outside source.
- Rent growth moved the most. In Relli's example, 0.9% rent growth instead of 3.5% cut the multiple from 1.69x to 1.04x.
- Recent actuals run low. National apartment rents rose 0.9% in the year to 3Q 2026, against 15.7% in March 2022.
- Projections often run high. About 3 in 10 CMBS loans from 2013 to 2019 overstated income by 5% or more.
In this guide · 12 sections
- How do you analyze a real estate pro forma?
- What is a real estate pro forma?
- What are the key lines in a real estate pro forma?
- How is NOI built in a pro forma?
- What does a pro forma walkthrough look like for a passive investor?
- Which metrics does a pro forma produce?
- Which pro forma assumptions deserve the hardest look?
- How much does each assumption move the return?
- How do pro forma projections compare with actual results?
- How do you compare a pro forma with actual results after you invest?
- What are the red flags in a real estate pro forma?
- What should LPs ask a sponsor about the pro forma?
Start here
How do you analyze a real estate pro forma?
Analyzing a real estate pro forma means rebuilding it line by line, checking each assumption against a dated source and stress testing the result. Five steps cover the work.
- Get the full model: ask for the year-by-year spreadsheet, the T-12 (the last 12 months of actual results) and the rent roll.
- Rebuild the top lines: confirm that rent, vacancy, other income and expenses add up to the sponsor's net operating income (NOI).
- Check each assumption: compare rent growth, vacancy, expenses, reserves and the exit cap rate with dated market data.
- Test the loan: find the rate, the coverage ratio and the maturity date.
- Change one input at a time: see how far the equity multiple and internal rate of return (IRR) fall when each one misses.
What is a real estate pro forma?
A real estate pro forma is the sponsor's forecast of a property's income, expenses, loan payments and sale price, year by year. Every number in it is an assumption, even when year 1 starts from actual results. Some sponsors spell it "proforma" or call it the underwriting model.
The T-12 shows what a building earned, while the pro forma shows what the sponsor expects it to earn. A limited partner's (LP's) projected return comes straight from the pro forma. The guide to reading a private placement memorandum (PPM) covers the documents around it.
The lines
What are the key lines in a real estate pro forma?
The key lines in a real estate pro forma run from gross rent at the top to cash flow and sale proceeds at the bottom.
| Line | What it is | What to check |
|---|---|---|
| Potential gross rent | Rent if every unit were leased | The rent roll |
| Vacancy and credit loss | Empty units, concessions, unpaid rent | At least 5% |
| Operating expenses | Taxes, insurance, repairs, payroll, management | Growth at least as fast as rent |
| Net operating income | Income before the loan | The cap rate it implies |
| Capital reserves | Savings for roofs, systems, unit turns | Dollars per unit |
| Debt service | Loan interest and principal | Rate type, maturity, rate cap |
| Sale proceeds | Final NOI over the exit cap, less the loan | Exit cap vs purchase cap |
How is NOI built in a pro forma?
Net operating income (NOI) in a pro forma is collected income minus operating expenses, counted before loan payments and income taxes. The guide to NOI and cap rates covers what belongs in it.
Capital reserves are the line that moves, because some pro formas subtract them above NOI and some below. Fannie Mae's guide takes the full reserve out of NOI to get "net cash flow," and lenders size loans on that lower figure. Ask which version a sponsor's NOI and cap rate use before comparing them with another deal.
Walkthrough
What does a pro forma walkthrough look like for a passive investor?
A pro forma walkthrough follows one property from rent to sale, line by line, using the sponsor's own base case.
Worked example
A sponsor buys a 60-unit apartment building for $10,000,000, with rents averaging $1,500 a month. The loan is $6,500,000, fixed at 5.5% and interest only, and investors put in the other $3,500,000. The sponsor assumes rents grow 3.5% a year and expenses 3%, with vacancy at 5% and a sale after year 5 at a 6.0% cap rate.
| Line | Year 1 | How it is built |
|---|---|---|
| Potential gross rent | $1,080,000 | 60 units x $1,500 x 12 |
| Vacancy and credit loss | -$54,000 | 5% of potential rent |
| Other income | +$36,000 | $50 a unit a month |
| Effective gross income | $1,062,000 | What is collected |
| Operating expenses | -$487,000 | $8,117 a unit |
| Net operating income | $575,000 | 5.75% of the price |
| Capital reserve | -$18,000 | $300 a unit |
| Debt service | -$357,500 | $6.5M x 5.5% |
| Cash flow to investors | $199,500 | 5.7% of $3.5M |
- With 3.5% rent growth and 3% expense growth, NOI reaches $670,547 in year 5.
- The five years of cash flow total $1,231,890, rising each year as NOI grows.
- The sale at $670,547 / 6.0% brings $11,175,777, and repaying the $6,500,000 loan leaves $4,675,777.
- Total back is $4,675,777 + $1,231,890 = $5,907,667 on the $3,500,000 invested.
The base case returns about $5.9 million on $3.5 million in five years. That is a 1.69x equity multiple and a 12.2% IRR, before fees and the promote.
Which metrics does a pro forma produce?
A pro forma produces the ratios investors use to compare deals, and the example shows how each one is calculated.
- Going-in cap rate: $575,000 / $10,000,000 = 5.75%.
- Expense ratio: $487,000 / $1,062,000 = 45.9% of collected income. Operating costs, taxes and payroll took 44 cents of each apartment rent dollar in 2025, per the National Apartment Association (NAA).
- Debt service coverage ratio (DSCR): $575,000 / $357,500 = 1.61x.
- Cash-on-cash return: $199,500 / $3,500,000 = 5.7% in year 1, with a five-year equity multiple of 1.69x and an IRR of 12.2%.
The guide to IRR, equity multiple and cash-on-cash return explains why they can disagree.
Benchmarks
Which pro forma assumptions deserve the hardest look?
The pro forma assumptions that deserve the hardest look are rent growth, vacancy, expense growth, reserves, the exit cap rate and the loan.
| Assumption | In the example | Dated benchmark |
|---|---|---|
| Rent growth | 3.5% a year | +0.9%, 3Q 2026 (RealPage) |
| Vacancy | 5% | 5% floor (Freddie Mac) |
| Expense growth | 3% a year | +4.6% in 2025 (NAA) |
| Reserves | $300 a unit | Sized by inspection (Fannie Mae) |
| Exit cap rate | 6.0%, bought at 5.75% | 5.79%, 2Q 2026 (RealPage) |
| Debt coverage | 1.61x | 1.25x minimum (Freddie Mac) |
Rent growth
Rent growth is an assumption often carried over from a better year. RealPage measured annual apartment rent growth at 15.7% in March 2022 and 0.9% in the third quarter of 2026. Ask for dated rents at comparable buildings nearby, not only a national figure.
Vacancy and expenses
Freddie Mac tells its small balance lenders to underwrite physical vacancy at 5% or more. National occupancy was 95.4% in the third quarter of 2026, and 22.7% of units offered concessions (RealPage). Expenses rose 4.6% in 2025, to $8,213 per unit, while revenue rose 2.7% across 13,471 communities (NAA). A pro forma with expenses growing slower than rent bets that 2025 does not repeat.
Reserves
Fannie Mae sizes reserves on conventional loans from a property condition assessment, not a flat amount per unit. MIT's course puts long-run capital spending at "at least 10% to 20% of the NOI" for most commercial property. The example's $18,000 is about 3% of NOI, which may be light for an older building.
Exit cap and the loan
Apartment cap rates averaged 5.79% in the second quarter of 2026, up from 4.64% in mid-2022 (RealPage, using MSCI data). At 5.79% instead of 4.64%, the same NOI is worth 19.9% less, by Relli's math. The guide to evaluating a syndication deal shows how to stress the exit.
On the loan, Freddie Mac generally requires 1.25x coverage on fixed-rate loans and 1.15x on floating-rate loans at the maximum capped rate. The Secured Overnight Financing Rate (SOFR), the base for most floating loans, was 0.05% in March 2022 and 3.88% on October 20, 2026 (FRED).
One at a time
How much does each assumption move the return?
Each assumption moves the return by a different amount, and changing them one at a time shows which ones the deal depends on.
Sensitivity test
The 60-unit building is re-run with one input changed at a time, then with all four changed together.
| Case | Changed input | Year-5 NOI | Equity multiple | IRR |
|---|---|---|---|---|
| Sponsor's base case | None | $670,547 | 1.69x | 12.2% |
| Slower rent growth | 0.9% a year, not 3.5% | $552,628 | 1.04x | 1.0% |
| Higher vacancy | 8%, not 5% | $633,367 | 1.46x | 8.6% |
| Higher exit cap | 6.5%, not 6.0% | $670,547 | 1.44x | 8.5% |
| Faster expense growth | 4.6% a year, not 3% | $635,687 | 1.50x | 9.3% |
| All four at once | Every change above | $484,186 | 0.47x | -16.4% |
Rent growth matters most here: at the 0.9% national pace of late 2026, investors get back about their money (1.04x) instead of 1.69x.
Rent and expense growth compound every year, so a small gap at the start widens over the hold. Misses also stack: four moderate changes together leave investors with less than half their money. Fees and the promote come out after these figures, as the guide to sponsor fees and the promote shows.
Projected vs actual
How do pro forma projections compare with actual results?
Pro forma projections have often run ahead of actual results, though Relli found no public study that tracks syndication pro formas deal by deal.
The closest evidence comes from lenders: Griffin and Priest studied 39,522 loans ($650 billion) pooled into commercial mortgage-backed securities (CMBS) from 2013 to 2019. About 3 in 10 had projected income at least 5% above actual first-year income (Journal of Finance, 2023, via UT Austin McCombs). The study covers lender underwriting, not sponsor pro formas.
Rising rates exposed the gap again when CRED iQ re-sized $136 billion of agency and CMBS apartment loans maturing from October 2026 to December 2028. Of the loans made in 2021 and 2022, 46% would need new equity to refinance, against 15% of 2016 to 2018 loans. Commercial Observer reported the figures on October 19, 2026. The syndication risks guide covers what investors face when a deal falls short.
How do you compare a pro forma with actual results after you invest?
A pro forma is compared with actual results by asking the sponsor to report each quarter's income, expenses and NOI next to the original projection.
Before you invest, check the pro forma against the T-12 and rent roll. For the sponsor's earlier deals, ask for projected and actual returns side by side, as the sponsor vetting guide describes. The Financial Industry Regulatory Authority (FINRA) tells firms selling private placements to check whether past performance shown was "exclusively selected based on positive results (or 'cherry-picking')."
Warning signs
What are the red flags in a real estate pro forma?
The red flags in a real estate pro forma are rosy assumptions with no evidence and a sponsor who won't show the model.
- Rent growth well above the 0.9% national pace of the third quarter of 2026, with no comparable rents behind it.
- Vacancy under 5%, or no allowance for concessions and unpaid rent.
- Expenses growing more slowly than rent, when 2025 expenses rose 4.6% and revenue 2.7%.
- An exit cap rate at or below the purchase cap rate.
- A floating-rate loan with no rate cap, or a cap that ends before the planned sale.
- A refinance that assumes lower rates or the same loan size.
- Year-1 NOI far above the T-12, or no year-by-year model at all.
Regulators point the same way: FINRA expects brokers selling private placements to analyze "management's assumptions upon which any business forecast is based" and to keep stress-test records. It adds that a refusal to provide information can itself be a red flag (Regulatory Notice 10-22, April 2010).
The Securities and Exchange Commission's (SEC's) investor bulletin (updated September 21, 2026) treats an issuer that "fails to adequately answer your questions" as a warning against investing.
Ask the sponsor
What should LPs ask a sponsor about the pro forma?
LPs should ask questions that make the sponsor explain where each assumption came from and what happens when it misses.
Where does the rent growth come from?
Ask for the comparable buildings and the dates of their rents, since a national average is a starting point, not evidence.
Are reserves above or below NOI?
The answer changes both NOI and the cap rate, so ask for the reserve in dollars per unit per year.
What does the deal return if each assumption misses?
Ask for a one-at-a-time table like the one above, after fees and the promote.
How did your past pro formas compare with results?
Ask for projected and actual NOI on earlier deals, including the ones that missed.
Sources
- Private Placements under Regulation D, Updated Investor Bulletin, SEC Office of Investor Education and Advocacy (Aug 17, 2022, updated Sep 21, 2026)
- Regulatory Notice 10-22: Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings, FINRA (Apr 20, 2010)
- Regulatory Notice 23-08: FINRA Reminds Members of Their Obligations When Selling Private Placements, FINRA (May 9, 2023)
- Multifamily Selling and Servicing Guide, Equity Checklist redline (glossary: NOI and net cash flow), Fannie Mae (effective Jun 2, 2026)
- Multifamily Guide, Part II, Chapter 4, Section 406: Replacement Reserve, Fannie Mae (accessed Oct 21, 2026)
- Small Balance Loan lender update: Underwritten Vacancy Rates, Freddie Mac Multifamily (Jun 28, 2024)
- Multi PC Program Overview, Investor Presentation, Freddie Mac Multifamily (as of Jun 30, 2026)
- Secured Overnight Financing Rate (SOFR), Federal Reserve Bank of St. Louis (FRED) (Oct 20, 2026 | accessed Oct 21, 2026)
- 11.431J Real Estate Finance and Investment: real estate cash flow pro formas, MIT OpenCourseWare (Fall 2006)
- U.S. Apartment Demand Closes in on a Slowing Supply Wave in 3rd Quarter, RealPage (Oct 6, 2026)
- U.S. Apartment Demand Plunges in 3rd Quarter as New Leasing Stalls More than Expected, RealPage (Oct 4, 2022)
- Apartment Cap Rates Hit an 11-Year High as 2Q Deal Volume Steadies, RealPage (MSCI Real Capital Analytics data) (Aug 6, 2026)
- Where a Dollar of Rent Went in 2025, National Apartment Association (Oct 14, 2026)
- Underwriting Fraud Imperils Commercial Mortgage Bonds (on Griffin and Priest, Journal of Finance, 2023), UT Austin McCombs School of Business (Oct 25, 2023)
- A Third of Maturing Multifamily Debt Needs Cash Infusion to Refinance, Commercial Observer (CRED iQ data) (Oct 19, 2026)
