Every acquisition starts with a pro forma. A projection of income, expenses, and cash flow that answers the question: does this deal make sense?
The problem is that most pro formas that independent landlords build—or inherit from sellers—contain the same set of errors. Not random errors. Systematic ones. The kind that recur across deal after deal because they're rooted in how people think about real estate, not in careless arithmetic.
The good news is that once you know what these mistakes look like, they're easy to spot and fix. The bad news is that uncorrected, they can take a deal that looks like it returns 8% and reveal it to actually return 3%—or less.
Here are the five that matter most.
Mistake 1: Using the Seller's Rent Roll as Your Income Assumption
The seller's rent roll is a starting point, not a conclusion. Yet most independent landlords drop it into their pro forma as "income" and move on.
The problems with this approach:
In-place rents may be below market. Sellers sometimes deliberately keep rents soft before listing to show consistent occupancy and minimize turnover. A 12-unit building with long-term tenants at $950/month looks stable—but if the market is at $1,150, you're acquiring at $24,000/year below potential. That's real upside, but it doesn't materialize immediately. Your pro forma should distinguish between current income and stabilized income.
Month-to-month leases look like occupancy but aren't. If half the tenancy is month-to-month, you have soft occupancy. Those tenants can leave on 30 days notice. Model at least a portion of that turnover into your first-year vacancy assumption.
Above-market leases are a liability, not an asset. Occasionally, sellers argue that above-market leases are a feature ("guaranteed income!"). They're not. Above-market leases normalize down when they turn over. Your pro forma should model forward-looking rents at market, not locked-in above-market rates as if they'll persist indefinitely.
The fix: Audit the rent roll against market comps yourself. Flag every unit that's more than 10% above or below current market rent. Build two income scenarios: current rent roll and market-rate stabilized. Use current for year 1, market rate for year 3 forward.
Mistake 2: Understating Vacancy
A seller presenting a building at 95–100% occupancy wants you to believe 5% vacancy is worst-case. It often isn't.
Two common ways landlords understate vacancy in pro formas:
Using point-in-time occupancy rather than trailing average. A building that was 100% occupied on the day it was listed may have run at 85% for three months over the past year. Ask for trailing 12-month occupancy, not just the current snapshot.
Not separating economic vacancy from physical vacancy. Physical vacancy is empty units. Economic vacancy is also units where rent isn't being collected—delinquent tenants, concessions, months where rent was waived. A building with no empty units can have 8–10% economic vacancy if collections are poor or turnover was recently high.
The industry standard benchmark: For underwriting purposes, use the higher of: the property's trailing 12-month vacancy rate, the submarket vacancy rate for the asset type, or 5% (the absolute floor even in tight markets). For smaller properties or self-managed older stock, 8% is a more honest floor.
The impact: On a 20-unit building generating $20,000/month GSR, the difference between 5% and 8% vacancy assumption is $7,200/year in projected income. At a 7% cap rate, that's a $102,000 difference in implied value. This is not a rounding error.
Mistake 3: Using "Pro Forma" Expenses Instead of Reconstructed Actuals
Seller-provided pro formas systematically understate expenses. This isn't always dishonest—sometimes it's a genuine difference in how expenses are categorized—but the pattern is consistent enough to be treated as a default assumption.
Common expense categories where seller pro formas come in too low:
Property management. If the seller is self-managing and doesn't charge management fees to the property, the pro forma shows no management expense. But you're either going to hire management (in which case it's a real cost) or self-manage (in which case your time has a real cost). Either way, budget 8–10% of collected rents.
Maintenance and repairs. Sellers use recent actuals, which tend to be lower than long-run averages. A property that had a good maintenance year or where the seller deferred some work will show artificially low maintenance costs. Budget $800–$1,500 per unit per year for a standard 1960s–1990s property regardless of what the trailing actuals show.
Capital reserves. Many pro formas show no capital reserves at all. Roof, HVAC, parking lot, major systems—these aren't annual expenses, so sellers don't include them. But you own the building for 10 years, and some of these will fail. Budget $800–$1,200 per unit per year as a capital reserve, held separately from operating cash flow.
Landscaping, snow removal, exterior maintenance. These often show up inconsistently or are absorbed into other categories. If the seller handles them personally and doesn't track them, they may not appear in the expense history at all.
The fix: Don't use the seller's expense history as your model. Reconstruct operating expenses from the ground up, category by category, using your own judgment on what each line should cost. Then compare against the seller's numbers. Large discrepancies—especially in management, maintenance, or reserves—warrant explanation.
Mistake 4: Ignoring Taxes at Reassessment
Here's a mistake that can cost $10,000–$20,000/year and only reveals itself after closing.
Property tax on a real estate sale often triggers a reassessment. The current assessed value may be lower than the transaction price, meaning taxes are calculated on a lower base. When you buy the property, the county reassesses at purchase price—and taxes increase.
How much? It depends on the jurisdiction, the prior assessment, and the relationship between assessed and market value in your county. In some markets (notably California under Prop 13, or parts of the Midwest with infrequent reassessment cycles), this effect can be dramatic. A building where the seller was paying $12,000/year in property taxes could reassess to $28,000/year after you buy it at a 40% premium to the last assessed value.
The fix: Before finalizing your pro forma, call the county assessor or check online records. Find the current assessed value and the applicable millage rate. Calculate what taxes would be if the property is reassessed at your purchase price. Use that as your property tax assumption, not the seller's trailing actual.
Some jurisdictions also have special assessments—local improvement charges for road work, sewer upgrades, or infrastructure bonds—that may attach to the property. These should also be checked before closing.
Mistake 5: Modeling Linear Rent Growth
Most pro formas include a rent growth assumption in years 2–5: something like 3% annually. This creates a clean, linear income projection that makes the IRR look attractive.
Real rent growth is not linear. It's lumpy, market-dependent, and subject to constraints that simple pro forma models don't capture.
The problems with linear growth:
It ignores turnover lag. You can only raise rent to market when a unit turns over or at lease renewal. If you have a stabilized, low-turnover property, it may take 3–5 years for market rent increases to flow through to your actual income. A 3% annual rent growth assumption applied uniformly to the whole portfolio overstates early-year income.
It ignores market cycle risk. Rent growth assumptions made during a strong rental market are often too high for a full market cycle. The past three years have seen unusually strong rent growth in most markets; building in 4–5% annual growth going forward in many markets is optimistic.
It compounds into fantasy. 3% annual growth over 7 years is a 23% total increase. On a $1,000 average unit, that's $1,230 in year 7. If the market is there, great. But 7-year rent growth projections are speculative, not analytical. Underwrite them lightly.
The fix: Model rent growth at the unit level, tied to lease expiration dates. Model your first-year rents as current in-place rents. Model renewals at projected market rents, conservatively. For years 3+, use a lower growth assumption (2–3%) than you might for years 1–2 (where you have more visibility). And run a zero-growth scenario alongside your base case so you can see what the deal looks like if rents are flat.
Putting It Together: The "Clean" Pro Forma
Here's what a corrected, honest pro forma process looks like for a 20-unit acquisition:
- Pull the rent roll and verify each unit against market comps. Flag deviations.
- Set year 1 income at current in-place rents, not market rent.
- Apply your vacancy assumption: higher of trailing actuals, submarket rate, or 8%.
- Reconstruct expenses from scratch. Use your own management cost, benchmark maintenance, and explicit capital reserves.
- Check property tax post-reassessment. Use that number, not trailing actuals.
- Model two rent growth scenarios: base (2–3% after year 1) and flat (0% growth). Present both.
- Derive NOI from this corrected income and expense model.
- Calculate cap rate on your NOI vs. asking price. Compare to market.
- Layer in your financing to get DSCR and cash-on-cash.
This takes longer than dropping the seller's numbers into a template. It produces a pro forma that reflects reality rather than a best-case narrative.
The Freehold Lens
Freehold's Acquisition Intelligence module flags pro forma inputs that deviate from market benchmarks—expense ratios that look too lean, vacancy assumptions below submarket average, rent roll to market rent gaps above 10%. When the seller's numbers don't match what comparable buildings actually experience, the platform surfaces the discrepancy for review rather than letting it pass through unexamined.
The output is a deal model you can trust, not one you're hoping holds up.
Bottom Line
Pro forma mistakes are almost always in one direction: optimistic. Higher income, lower expenses, lower vacancy, rosier rent growth. The aggregate effect is a deal that pencils better on paper than it will perform in practice.
The five mistakes in this article—anchoring to the seller's rent roll, understating vacancy, using pro forma expenses, ignoring tax reassessment, and modeling linear rent growth—are the predictable culprits behind most acquisition disappointments.
Fix them before you make an offer. The deals that look worse when you correct the pro forma aren't deals you should make. The ones that still work are the ones worth pursuing.
Good underwriting isn't pessimism. It's the prerequisite for confidence.