Episode 50: Pro Forma vs. Reality

Building Passive Income

00:00 / 00:19:24

Welcome to Building Passive Income with CREI Collin.

Most offering packages include a pro forma. It shows what the property could do in the future.

But here’s the problem.

Pro formas are often based on optimistic assumptions.

In this episode, CREI Collin breaks down how to stress test the numbers, separate projections from reality, and evaluate whether a deal actually works under conservative assumptions.

If you want to avoid overpaying and make smarter investment decisions, this episode gives you the framework.

In This Episode, You’ll Learn:

• What a pro forma is and why projections are often optimistic

• Six common ways sellers make pro formas look better than reality

• How to stress test a pro forma using actual performance

• How to adjust rent, vacancy, and expenses to realistic levels

• Why you should run best case, base case, and worst case scenarios

• How to build your own conservative pro forma

• Key questions to ask before trusting any projections

Key Topics Covered:

[00:00] Introduction – Why pro formas can be misleading

[02:00] What a pro forma is and how it is used

[03:30] Six common pro forma inflation tactics

[06:00] Step-by-step stress testing process

[09:00] Case study: $3.5M vs. $2.4M valuation gap

[12:00] Questions to ask before trusting projections

[13:30] Stress testing checklist

[14:30] Final thoughts and next steps

Key Takeaways: Pro Forma vs. Reality

Start with Actual Performance

Always begin with the T-12.

Use real income and expenses as your baseline before making adjustments.

Watch for Inflated Rent Assumptions

❗ Sellers often use market rents instead of actual rents

Reality: rents may be 10 to 15 percent lower

Rent increases take time and often create turnover and vacancy

Never Assume Zero Vacancy

Vacancy is part of every property.

Typical stabilized multifamily vacancy:

• 5 to 10 percent depending on market conditions

Compare Expenses to Market Benchmarks

⚠️ If expenses look too low, they probably are

Compare against similar properties in the same submarket

Adjust numbers to realistic levels

Include Property Management and CapEx

Even if you self-manage:

• Property management: 4 to 10 percent of gross income

• CapEx reserves: $250 to $500 per unit annually

These are real costs that impact returns

Run Three Scenarios

Always model:

• Best case
• Base case
• Worst case

Your base case should be conservative

Your worst case should still be survivable

Stress Test the Debt

Ask:

• What happens if interest rates rise?
• What if refinancing terms change?

Make sure the deal still works under pressure

Resources Mentioned:

• Pro forma stress testing checklist

• Three-scenario analysis template

• Market benchmark comparison tools

Ready to Build Your Passive Income Portfolio?

Schedule your free 30-minute consultation:
https://calendly.com/shelbi-creipartners/30min

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Disclaimer:

This podcast is for educational purposes only and does not constitute legal, tax, or investment advice. Always consult qualified professionals before making decisions.