What Makes a Good Pro Forma?
Key Inputs We Never Ignore (and the Mistakes That Kill Returns)
Garbage In, Garbage Out
You can't build a great project on a bad spreadsheet.
We've seen it again and again — investors and developers getting excited about a shiny new deal because the IRR looks amazing… until you dig into the assumptions.
The reality is simple: a pro forma is only as good as the inputs.
If your rent projections are inflated, your CapEx is missing, your debt terms are fuzzy, or your exit cap is fantasy — that glowing return means nothing.
At Arete, we live and die by our pro formas. Whether it's a 2-unit duplex or a $10M townhome project, our underwriting drives our confidence. And over the years, we've learned which inputs matter most — and which mistakes to avoid.
Let's walk through it.
The Key Inputs We Never Ignore
A good pro forma includes dozens of line items, but here are the non-negotiables:
1. Rent Revenue (Real Comps Only)
- No guessing. No "aspirational" rents.
- We pull rent comps from our own PM data, MLS, CoStar, Rentometer, and in-person leasing signs.
- We always underwrite to realistic market rents — and sometimes discount further if lease-up risk is high.
2. Capital Expenditures (CapEx)
- Deferred maintenance? Roofs? HVAC? Parking lot reseal? It goes here.
- We plan CapEx on a rolling 5–10 year basis — not just for year one.
3. Exit Cap Rate
- One of the most manipulated numbers in the spreadsheet.
- We always use a conservative cap — often higher than going-in market cap — especially in rising rate environments.
4. Holding Period
- 3, 5, or 10 years? That drives depreciation, interest, and resale assumptions.
- Short holds mean higher volatility. Long holds mean better amortization — and more chance for change.
5. Financing Terms
- Loan amount, rate, amortization, IO period — each of these impacts your cash flow curve.
- We test multiple loan scenarios using real term sheets, not back-of-napkin estimates.
Common Pro Forma Mistakes That Derail Deals
Even smart operators can fall into these traps:
- Overestimating Rent Growth: Assuming 5–6% annual rent bumps with no historical support. We cap ours at 2–3% unless there's a clear catalyst.
- Ignoring Vacancy and Lease-Up: Every property has downtime — especially new builds. We bake in realistic lease-up months and a 5–8% ongoing vacancy factor.
- Leaving Out Taxes & Insurance Escalation: In Texas, property taxes can wreck your NOI. We forecast post-stabilization values and assume tax jumps accordingly.
- Unrealistic Exit Cap Rate Compression: Hoping your exit cap is lower than your entry cap might juice returns on paper, but it's not how we underwrite.
- Not Stress-Testing for Rate Sensitivity: We run multiple DSCR and yield-on-cost scenarios based on interest rate ranges — because you never want to be surprised by your lender's takeout terms.
Real Example: Bad vs. Good Pro Forma
The Bad
- Projected $1,900/month rent in a market where comps averaged $1,675
- No CapEx reserve
- 4.5% exit cap in a 6% market
- Ignored lease-up and closing costs
→ IRR showed 28%, but in reality, the deal would have delivered closer to 12% — if it didn't lose money.
The Good
- Underwrote rents at $1,625 despite high-end finishes
- Added $750/unit/year for CapEx
- Modeled 6.25% exit cap and 2 months of lease-up
- Ran two financing options: 65% LTV bank debt vs 80% DSCR product
→ IRR came in at 17%, and the actual stabilized return? 18.4%.
It's not about impressing investors. It's about executing with eyes wide open.
Use Our Free Pro Forma Template
We've built dozens of project pro formas — from single units to townhome communities to covered RV/boat storage developments. And we've refined a model that works.
Want a copy?
→ Download our real estate pro forma template
It includes rent roll assumptions, OPEX formulas, CapEx, financing inputs, and multiple exit models — all in one spreadsheet.
Because when your inputs are right, your confidence is real.