Real Estate Tax Calc
What a proforma is (and isn't)
A proforma (from Latin: "as a matter of form") is a projected income statement for a rental property, showing what you expect to earn and spend over a holding period. It starts with market rents and works down to net cash flow — giving you the inputs for a cash-on-cash return, cap rate, or IRR analysis.
What a proforma is not: a guarantee. Sellers and brokers routinely present proformas with optimistic assumptions — low vacancy, below-market expenses, unrealistic rent growth. Your job as a buyer is to build your own conservative proforma and test the deal against realistic numbers, not take the seller's projections at face value.
The seven lines of a rental proforma
1. Gross Potential Rent (GPR): What you would collect if the property were 100% occupied at market rent for a full year. Start here with current market data, not wishful thinking.
2. Vacancy and Credit Loss: Subtract a realistic vacancy estimate — typically 5–10% for stabilized residential rentals in most markets, 10–15% for commercial or value-add deals. This gives you Effective Gross Income (EGI).
3. Other Income: Add income from laundry, parking, late fees, pet fees, or storage. Keep this conservative.
4. Operating Expenses (OpEx): The major line items are property taxes, insurance, maintenance and repairs, property management (8–12% of EGI), utilities (landlord-paid), HOA fees, and capital expenditure reserves (5–10% of EGI). A common shorthand is the 50% rule — half of EGI goes to expenses.
5. Net Operating Income (NOI): EGI minus all operating expenses. NOI is the unleveraged income of the property — it's what the cap rate is calculated on.
6. Debt Service: Annual principal and interest on your mortgage. This is based on your loan terms, not a property characteristic.
7. Cash Flow: NOI minus debt service. Divide by your total cash invested for the cash-on-cash return.
Common proforma mistakes to avoid
Using scheduled rent instead of market rent creates optimistic projections if current tenants are below market. Assuming zero vacancy is unrealistic — every property has turnover. Using actual maintenance costs from a great recent year instead of long-run averages understates expenses. Omitting CapEx reserves is the most common error: roof, HVAC, appliances all wear out. Build in reserves even if you don't spend them every year.
Model at least three scenarios: base case (realistic), bear case (10% below market rent, higher vacancy), and stress test (vacancy plus a major repair). If the deal works in the bear case, you have real margin of safety.
A worked five-year proforma
Start with a concrete deal: a fourplex at a $600,000 purchase price, gross potential rent of $6,000 a month ($72,000 a year). Apply a 7% vacancy allowance ($5,040) to reach effective gross income of $66,960. Subtract operating expenses — property taxes $7,800, insurance $2,400, repairs and maintenance $4,800, property management at 9% of collected rent ($6,026), and a CapEx reserve of $4,000 — totaling $25,026. That leaves net operating income of $41,934, a 7.0% cap rate on the purchase price before any financing.
Now layer in debt. With 25% down ($150,000) on a $450,000 loan at 7% over 30 years, annual principal and interest run about $35,916. Cash flow before taxes is $41,934 minus $35,916 = $6,018. Against roughly $170,000 of cash in (down payment plus about $20,000 of closing costs and initial repairs), that is a 3.5% cash-on-cash return in year one — a number the seller's rosy proforma would never show once honest vacancy, management, and reserves are included.
Projecting rent and expense growth over the hold
A single-year snapshot understates a long-term hold. A credible multi-year proforma grows rents at a modest rate — 2% to 3% a year is a defensible planning assumption in most markets — and grows operating expenses at a similar or slightly higher rate, since insurance and property taxes often outpace rents. Do not assume expenses stay flat while rents climb; that is the most common way a proforma flatters a deal.
Because most of the mortgage payment is fixed, small rent increases flow disproportionately to cash flow over time. A property that yields 3.5% cash-on-cash in year one may reach 6% or 7% by year five as rents rise against a fixed loan payment — but only if your expense growth assumptions are honest. Model each year separately rather than applying a single blended growth rate to the whole hold.
Modeling the exit and the return of capital
A complete proforma ends with a sale. Estimate an exit value by applying a market cap rate to your projected year-of-sale NOI — the direct capitalization method appraisers use. If you buy at a 7% cap and underwrite a sale at a slightly higher 7.5% cap, you are stress-testing for cap-rate expansion rather than assuming the market stays in your favor.
From the projected sale price, subtract selling costs (typically 6% to 8% for commissions and closing), the remaining loan balance, and the taxes due on the gain and on depreciation recapture. What remains is your net sale proceeds — the return of capital plus profit that, combined with the annual cash flows, drives the internal rate of return (IRR). A proforma that stops at annual cash flow and never models the exit ignores where most of a real estate return is actually earned.
Turning the proforma into cap rate, cash-on-cash, and DSCR
The proforma feeds every return metric a lender or investor cares about. Cap rate is NOI divided by purchase price and measures the unleveraged yield. Cash-on-cash is annual pre-tax cash flow divided by cash invested and measures the leveraged yield on your money. The debt-service coverage ratio (DSCR) is NOI divided by annual debt service — lenders typically want at least 1.20 to 1.25, meaning NOI exceeds the mortgage payment by 20% to 25%.
In the fourplex example, DSCR is $41,934 divided by $35,916 = 1.17 — just under a common 1.20 threshold, which tells you a lender may require more down or a lower rate before funding. Reading these three ratios off one proforma lets you see, at a glance, whether a deal clears both your return targets and the lender's underwriting box.
Where the proforma meets your tax return
The proforma's operating lines map closely to Schedule E, where individual landlords report rental income and expenses. But two items diverge. First, depreciation — a large non-cash deduction (residential buildings over 27.5 years) — appears on the tax return and often turns a cash-flow-positive property into a taxable loss, yet it never appears as a cash outflow in the proforma. Second, principal payments reduce your loan balance and consume cash but are not deductible, so they hit the proforma's cash flow without reducing taxable income.
Because of these differences, a property's pre-tax proforma cash flow and its taxable income are rarely the same number. Sophisticated investors build an after-tax proforma that adds back the tax savings (or subtracts the tax owed) on the taxable result, giving a truer picture of what the deal delivers to a taxpayer in a given bracket.
Stress-testing and sensitivity analysis
The single most valuable thing a proforma does is let you break the deal on paper before you break it with your money. Run the numbers at higher vacancy (12% instead of 7%), higher interest rates (add 1% to the loan), and a major capital event (a $15,000 roof in year two). If the property still covers its debt service under two of the three shocks, you have genuine margin of safety.
Identify which input the return is most sensitive to. For a highly leveraged deal, the interest rate and vacancy usually swing the outcome the most; for an all-cash purchase, expense growth and the exit cap rate dominate. Knowing the one or two variables that make or break the deal tells you where to focus your due diligence — verifying actual property taxes, confirming market rents with comparable leases, and pinning down the true condition of the roof and mechanicals.
Frequently asked questions
What is a good NOI margin for a rental?
After operating expenses, a healthy rental might show NOI at 45–60% of Gross Potential Rent, depending on the market and property type.
How far out should a rental proforma project?
For a simple purchase analysis, a 5-year proforma is standard. For value-add or development projects, 10 years is common to capture the hold and exit.
What is the difference between proforma NOI and actual NOI?
Proforma NOI is projected (before you own the property). Actual NOI is what the property delivered historically, from rent rolls and bank statements.
What is the difference between a proforma and a rent roll?
A rent roll is a snapshot of current leases — tenants, unit numbers, rents, and lease expirations — showing what the property actually collects today. A proforma is a forward-looking projection of income and expenses. Use the rent roll to verify a proforma's revenue assumptions against reality.
Should a proforma use current rents or market rents?
Both, in separate scenarios. Model current (in-place) rents to see what the property produces today, and market rents to see the upside once leases turn over. Never blend the two into one optimistic line — a value-add thesis that depends on raising rents should be shown explicitly, not baked silently into year one.
How do I choose the exit cap rate?
Start with the cap rate you are buying at, then adjust for risk. A conservative underwrite assumes the exit cap is 0.25% to 0.75% higher than the entry cap, reflecting an older building and the possibility of higher interest rates at sale. If your return only works when the exit cap is lower than the entry cap, the deal depends on market appreciation rather than the property itself.
What DSCR do lenders require for a rental?
Most commercial and DSCR lenders want a debt-service coverage ratio of at least 1.20 to 1.25 on the property's NOI, though the threshold varies by loan program and market. A DSCR below 1.0 means the property's income does not cover its mortgage payment — a clear warning that the deal is over-leveraged at the proposed terms.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.