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7 Red Flags to Spot in a Real Estate Pro Forma Before You Invest

So Last week I introduced you to Proformas. What they are and why they matter. Here are some things to look for as you are evaluating a real estate investment.

If every pro forma came true, we’d all be sipping piña coladas on a private island by now. The truth?

Some projections are built on solid math, while others are built on wishful thinking. As an investor, your job isn’t just to look at the bottom-line return—it’s to evaluate whether the assumptions behind it actually make sense.

ALERT!: Not sure what a specific word means? Check out our Investment Terms Glossary Here.

Common Red Flags in a Pro Forma

1. Unrealistic Rent Growth

If rents are shown climbing 8–10% every year, that’s not growth, that’s fantasy.
What good looks like: Sustainable rent growth usually hovers around 2–3% per year, sometimes a little higher in high-demand markets. Always ask what market comps or data back up those numbers.

2. Perfect Occupancy

A pro forma showing 100% occupancy for the entire hold period is ignoring reality.
What good looks like: Smart operators plug in a 5–7% vacancy factor depending on the market.

3. Magically Low Expenses

If operating expenses look shockingly low, that’s a red flag.
What good looks like:
- Multifamily apartments: Operating expenses typically run 40–50% of rental income.
- Commercial properties: Often 30–40%, but watch for NNN (Triple Net) leases. With NNN, tenants reimburse taxes, insurance, and maintenance—reducing the property’s expense load. A conservative pro forma still accounts for some landlord costs.

4. Loss to Lease Ignored

Every property has turnover. Even with strong tenant retention, there’s downtime while units are cleaned, repaired, and marketed. If that downtime isn’t factored in, projected income will be overstated.
What good looks like: A pro forma should include a realistic allowance for turnover downtime, often called “loss to lease.” Ask how many days or weeks they’ve assumed for turnover per unit. This should be a separate line item from vacancy.

5. Too Much Debt, Not Enough Cushion

If the deal is barely covering loan payments, that’s risky.
What good looks like: A healthy deal shows a Debt Coverage Ratio (DCR) of at least 1.25—meaning the property generates 25% more income than is needed to service the debt. Also pay attention to the loan structure:
- Fixed-rate debt: predictable payments and more stability.
- Variable-rate debt: payments can rise if interest rates go up, and that can crush returns.

6. No “Rainy Day” Fund

Big-ticket repairs are inevitable—roofs, HVAC systems, parking lots all wear out.
What good looks like:
- Multifamily: Reserves of at least $250–$300 per unit, per year.
- Commercial: A clearly labeled CapEx reserve, even if NNN leases cover most operating expenses.

7. Over-Optimistic Exit

The exit strategy is often where numbers get stretched.

What good looks like: The pro forma should show both the current cap rate (today’s market) and the projected exit cap rate (future sale). A conservative assumption is that the exit cap rate will be 0.25–0.50% higher than the entry cap rate. If the exit cap rate is lower, that’s betting the market will be better in five years—a risky assumption.

Why This Matters

It’s easy to be dazzled by glossy IRRs and double-digit returns. But the real skill is learning to question the inputs. A pro forma built on realistic assumptions creates confidence. One built on overly rosy projections sets you up for surprises—and not the good kind.

✅ Takeaway: Always look beyond the final return number. Question the rent growth, vacancy, expenses, debt, CapEx, and exit strategy. If the assumptions don’t hold water, neither will the deal.