Content Writer, Stacker

Staff Writer, Stacker

Belong Co-Founders

Head of Marketing

A real estate pro forma is a financial projection of rental income and expenses, highlighting what a rental property could, should, or would gross in revenue.

What is Pro Forma in Real Estate?

A real estate pro forma uses current or potential rental income and operating expenses to help potential investors understand the risks and benefits of purchasing a property. While there are different kinds of pro formas in various industries, they all present financial projections for a specific period of time in a standardized way. 

It’s important to note that a real estate pro forma is a financial projection of rental income and expenses, not an actual report. A pro forma highlights what a rental property could, should, or would gross in revenue. As such, a pro forma is a tool used to evaluate the risks or benefits of a potential rental property. However, you need to consider critical factors in calculating your pro forma. Most importantly, you must learn to spot a pro forma that inaccurately reflects a potential real estate investment. 

What real estate investors need to know about pro forma reports for real estate 

If you’re interested in purchasing a real estate investment, pro formas are essential to evaluate potential properties. A real estate pro forma report can indicate a property’s projected net income and possible cash flow projections. 

An accurate pro forma report can help investors estimate and project the rate of return for a rental property. The pro forma outlines income, expenses, potential revenue, and the operating income of a property. This information is critical if you are new to investing in real estate, renting a home, or unfamiliar with the geographic area.  

What included in a pro forma statement for rental property

While there are many different ways to present the information in a real estate pro forma, nearly all of these documents will include three main types of information. A pro forma will include a projection of a rental property's net operating income (NOI). The net operating income may also be called before-tax cash flow. The NOI is calculated by subtracting operating expenses from the effective gross income. 

NOI = Effective Gross Income - Operating Expenses 

While each pro forma will include slightly different information, you should see expenses, gross income, and the net operating income on each pro forma document. 

How to calculate gross income for a pro forma

You can calculate the effective gross income using a simple formula. Take the total projected income, add any other income for the property, and subtract a vacancy allowance. 

Gross income = (Total Projected Income + Other Income) - Vacancy Allowance 

The projected gross income for a rental property should reflect the total rental income the property would generate if you leased it 100% of the time. The projected gross income should reflect the current rent if the property is rented. If the property is not leased, the gross income may be an estimate based on the current rental market. 

Other income should include things such as late fees or pet fees. However, this additional income should not include security deposits.

The vacancy allowance for a rental property is an estimate that allows prospective rental property owners to account for any time when the property may not be rented. The vacancy allowance should include the time the property may be vacant between residents. It should also include any time you need between the purchase and when a new resident will move into the property. 

How to calculate operating expenses for pro forma 

Calculating the operating expenses for a real estate pro forma requires understanding the costs associated with managing and maintaining a rental property. These expenses fall into four categories: repairs and maintenance, property management costs, mortgage payments, and additional miscellaneous expenses. 

Repairs and maintenance: If you are unfamiliar with maintaining a rental property, it’s helpful first to consider standard rental property maintenance costs. You should also consider a potential property's annual maintenance costs. If a potential property is older or less updated, you can expect there to be more maintenance and repairs. Similarly, it’s helpful to consider the age and condition of the major home systems like central air, water heaters, or the roof. Your estimate for maintenance also needs to include a reserve amount used for future maintenance or repairs.

Property management costs: Your real estate pro forma must include the property's management costs. If you plan to self-manage the property, you must account for all management expenses, including your own time. Most property management services will charge a percentage of the monthly rental value, typically between 6-12%. However, there are often additional costs and fees associated with traditional property management. So while an initial package may only cost 6% of your monthly rent, extra expenses can add up quickly.

Mortgage payment: If you will not own the property outright, you will need to include the principal, interest, and property taxes on the pro forma. 

Expenses: Your real estate pro forma should include any additional expenses associated with the rental property. These expenses include utilities, insurance, legal fees, marketing, HOA fees, or any other costs you can estimate.  

Why accurate pro forma calculations are important

An accurate pro forma will provide an essential financial snapshot of a rental property. A more precise pro forma will allow you to evaluate a potential real estate investment effectively. 

Further, almost all real estate investment metrics/calculations (cap rate, cash-on-cash, and ROI) rely on accurately calculating NOI and cash flow: 

Capitalization Rate = Net Operating Income / Purchase Price

Cash-on-Cash Return= Total Cash Invested/ Annual Pre-Tax Cash Flow

ROI = (Gain on investment – Cost of investment) / Cost of Investment

Conversely, if a pro forma is incorrect or misrepresents a property, you may risk making poor financial decisions. An inaccurate pro forma can result in overpaying for a rental property or misjudging the potential success of a property. Poor financial projections might cause you to set the rent too high because you did not include all expenses in the initial pro forma. You may also miss out on a real estate investment opportunity because of miscalculations.  

How to avoid misleading pro forma reports 

Unfortunately, you may also encounter pro formas that present information in a way that either misrepresents a property, aims to emphasize optimistic financial projections, or downplays expenses. 

An overly simple pro forma might only include the purchase price, gross annual rent, cash flow per month, and appreciation. In this case, the pro forma does not accurately capture the expenses associated with owning a rental property.

Similarly, overly complicated pro formas make it difficult to compare potential real estate investments accurately. Keep in mind that sellers are incentivized to provide an optimistic pro forma. It’s vital to avoid wishful thinking when you evaluate a real estate investment or pro forma. 

In real estate investing, comparing properties using the same criteria and data points is best. Because of this, you should use the same pro forma calculations for each potential investment. We also recommend that you do not rely on a pro forma that the seller’s agent provides. 

Carefully review any gross income data that a seller provides. Potential rental income or rent rate projections can widely differ from the current rental market. Always do your best to conduct your own calculations and ensure you have an accurate sense of what rental rates are in the area. For a precise pro forma, you’ll need to understand how much rent to charge and consider all rental pricing factors related to a potential rental property. It can be challenging to project rent, as pricing factors can fluctuate over short periods.

Belong makes pro forma calculations simple 

Due to high costs and hidden fees, traditional property management companies can negatively impact your pro forma. However, Belong offers homeowners a modern alternative to property management that makes financial projections easy and straightforward. 

Rental pricing: Belong's unique proprietary algorithm tells you exactly how much rent to charge, thanks to real-time data and insights about your individual property.

Guaranteed Rent: Did you know Belong homeowners get guaranteed rent, no matter when their residents pay? Estimating rental income couldn’t be easier thanks to steady and guaranteed payments with Belong.

A comprehensive list of regulations and legal considerations when creating a lease for your real estate investment - and a simpler alternative to going it alone

How to Create a Lease for your Real Estate Investment Property

Residential lease agreements protect you, your investment, and your new residents. To create a lease for your real estate investment property, you’ll need to consider what policies and clauses need to be included. Then you can begin to structure your agreement using one of our examples and consider consulting a professional to help finalize your agreement. Best of all, we’re sharing a new alternative to help you create a lease and find residents who love your home as much as you do. 

Legal considerations for residential leases 

Residential leases provide both you and your residents with legal protections. As such, there are several legal requirements you’ll need to consider before creating a lease for your real estate investment property. All residential rental agreements must adhere to landlord-tenant laws in your area.

You’ll find that most states have requirements around security deposits, occupancy limits, property maintenance, late fees, and grace periods for late payments. These requirements will vary depending on the state where your real estate investment property is located. These legal guidelines may also dictate specific landlord and tenant responsibilities, which you must abide by. 

Most states will require that you provide your residents with specific information regarding lead paint and bedbugs. In some cases, you must include this information in the lease agreement. You may include educational pamphlets in other states as an addendum to the lease. 

You should also familiarize yourself with Fair Housing Laws, which govern how you can market a property, screen for tenants, and regulate the use of your rental home. These laws ensure that everyone has fair access to housing and prevent discrimination. There are federal and state Fair Housing Laws, and failing to adhere correctly can expose you to legal action. 

Further, additional regulations govern everything from the condition of your investment property to renting your home to people with children or service animals. Closely review all applicable laws and regulations before you begin drafting your lease. 

Once you’ve identified which regulations will apply to your rental property, you can begin collecting the basic information needed for a lease agreement. Naturally, you will need the name of your residents, the lease term, the rental amount, and directions for how your residents can make rental payments. 

Your lease should also include information about your investment property, including a description of the property and its current condition. You will also need to outline details regarding access to the property and usage rules for the property. For example, your lease should clearly outline parking and storage inclusions. Likewise, you can include details about any common or outdoor spaces. If there are rules for shared areas, like pools or gyms, you should also have those rules as an addendum to your lease agreement.  

Additionally, your lease needs to include information about any security deposits or fees that may be required. It’s also critical to provide clear guidance around utilities. The agreement should clearly state which utilities are the resident’s responsibility and indicate who is responsible for transferring or initiating utility service. 

Finally, a standard lease agreement needs to include a lease termination clause. More specifically, your lease termination policy needs to outline what will happen if your resident breaks their lease before the end of the rental period. Remember that what you include in a lease termination clause is subject to regulations, and you'll want to carefully review legal precedent or engage the services of a professional. 

Additional guidelines to include in your rental agreement

While the inclusions discussed so far are a great starting point for creating a lease for your real estate investment property, you should consider several additional items. 

Maintenance policies and procedures: These policies will describe the resident’s responsibility to maintain the property and create a process for notifying you of any damages or requested maintenance. Finally, these guidelines will outline what kind of alterations your residents can make to the property (i.e., painting walls).

Entry: Entry clauses outline how and when you will access the rental property and must be consistent with your state’s landlord access laws. This clause also includes guidance for what happens in the case of an emergency. For example, if you have a water leak and your resident is not home, these clauses grant you the right to access the property to turn off the water or fix the leak.

Prorated rent: A prorated rent clause can provide your resident with information about how prorated rent is collected and calculated. This clause is beneficial if your resident pays prorated rent at the beginning of their term. 

Subletting: Your lease agreement should include a clause that either permits or restricts your residents from subletting the property. In some cases, related clauses can dictate whether or not the residents can lease the property as a short-term rental.

Illegal activities: It’s critical to include a clause prohibiting illegal activities. This clause will help limit your liability. 

Rules and HOA Guidelines: This clause requires residents to acknowledge receipt of rules or additional guidelines as dictated by the HOA (pool rules, community guidelines, good neighbor policies).

Move-Out Guidelines: You’ll want to ensure your lease clearly defines your resident's obligations at the end of their rental period. These move-out guidelines might include any cleaning procedures, how damages are assessed, and the process for providing notice and returning the keys. 

Renewal: Finally, you may want to include information on how the renewal process works and any procedures your residents may need to follow. 

Additions and customizations for your residential lease agreement 

Depending on the specifics of your real estate property, there are several additional sets of guidelines you may need to consider including in your lease agreement. 

Smoking policies: You do have the right to prohibit or restrict smoking on your property. If you choose to permit smoking in some capacity, your lease agreement should clearly outline those expectations. 

Cannabis: Similarly, you have the right to prohibit the use of cannabis, even if it is legal locally. A drug-free lease clause will also prohibit tenants from growing cannabis on the property. 

Pets: If you choose to permit pets in your rental property, you must include guidelines and information regarding any pet deposits or monthly pet rent you may require. 

Co-signer requirements: A co-signer is designated to make the rental payments if the resident does not pay. A co-signer agreement can provide additional protection if a resident does not have a solid or significant credit history. 

Renters insurance requirements: You may also require your residents to retain a renters insurance policy that protects a tenant’s belongings. 

Lease examples for your real estate investment property 

Once you’ve considered which of these policies and clauses are appropriate for your rental property, you can begin to assemble a lease agreement. We recommend using these examples to understand how you can structure and organize your rental agreement. However, because regulations vary based on location and frequently change, you should use these examples only as a guide. These examples do not constitute legal advice. 

Protect your real estate investment and work with a professional 

Your lease agreement is essential to protecting your real estate investment property. Because its importance cannot be understated, we highly recommend that you consult with a professional to ensure that your lease agreement protects your best interests and does not violate federal, state, or local laws. 

An attorney specializing in real estate agreements can provide you with essential guidance. Remember that an attorney may not be familiar with your real estate investment property and its unique challenges, so you’ll need to come prepared and know what needs to be included in your lease. 

Learn the guidelines that dictate how you should calculate square footage for your rental home.

How to Calculate Square Footage (And Why it Matters for your Rental Listing)

When preparing a rental listing, you need to know the square footage of your property, but did you know that there’s more to square footage than a simple number? The size of your rental property is crucial in attracting potential residents, but specific guidelines dictate how you should calculate square footage. Further, square footage is essential to pricing your rental property correctly and attracting the right residents. 

How to calculate residential square footage 

Calculating the square footage for your rental property is relatively easy. You’ll need paper, a pen or pencil, a tape measure or a laser distance meter, and your phone or calculator to start. Having a second set of hands can also be helpful if you plan to use a tape measure. 

Start by creating a sketch of your rental property, or use an existing floor plan or layout if you have one. One by one, go through each room, closet, and hallway and measure the length and width of each space. Once you have the length and width of each area, multiply the length by the width and note the square footage of each room. Once you’ve moved through the whole house, add the square footage of each space to calculate the total square footage of your rental property. You can round up to the nearest whole number. 

What should be included or excluded when calculating square footage

Although calculating square footage for your rental listing is pretty simple, you may ask which spaces or rooms to include and which ones to omit from the home’s total square footage. 

Generally, you should include all finished and heated interior areas in a home, including hallways and closets. As a result, you’ll need to omit several spaces from the total square footage calculation. 

Exclude these spaces from your square footage calculations: 

Including the square footage of basements and attics

Calculating and including the square footage of basements and attics can present a few challenges for property owners. It’s best practice to indicate the square footage of any basements in your rental listings. You should also note what portion of the basement is finished or unfinished. 

In some cases, you may include the square footage of a finished basement in the total square footage of the home. However, some local or state regulations may require that basement square footage be listed separately, even if the basement is finished. 

Similarly, you can include the square footage of your attic if the space is finished and the attic has a ceiling height of at least 7 feet for 50% or more of the area. Additionally, you can include covered or enclosed porches if your home’s HVAC system heats them. 

Ultimately, you should aim to accurately and fairly represent the square footage of the rental property to ensure that you attract the ideal residents.  

How to verify your property’s square footage 

If you’ve calculated the square footage of your property, it’s a good idea to verify your calculations. There are a few ways you can do this. For almost every property, you can search public records. The county assessor typically creates and maintains documents that will include the home’s square footage. Start by searching the address on the county property appraiser's website. 

If you have the builder plans for your property, the square footage is likely already included in those documents. Most home plans will also include the square footage of each space within a property. If you purchased the home, you might also refer to the property’s listing from the time of purchase. Remember that this may not be an official square footage calculation, but you can still use this number to verify your own calculations. Finally, if you have any property appraisal documents, you will likely find the square footage included in the appraisal. 

Over time, industry leaders have worked to standardize the process and guidelines for calculating square footage. Square footage is a crucial measurement and indicator of your property value, and having accurate, reliable, and consistent data for each property is essential. As such, there is an effort to establish shared expectations around calculating square footage. Different states may require you to calculate square footage in a specific way for renting or selling a property. Further, several agencies have established standards for calculating residential square footage. 

The American Measure Standard sets voluntary guidelines for measuring residential square footage. These guidelines have been compiled and edited by a group of real estate professionals, including real estate agents, appraisers, assessors, home builders, and architects. 

Similarly, the American National Standards Institute (ANSI) also provides guidance on what constitutes living space and how you should calculate square footage. Fannie Mae uses ANSI standards for all appraisals to ensure consistency across the country. These guidelines only apply to single-family homes and not to apartments or condos.  

How to include square footage in your rental listings 

Once you’ve calculated the square footage for your rental property, you can consider how to communicate this information in your rental listing. Knowing the square footage of your property and effectively communicating that information to potential residents is essential to finding a good, long-term fit for your home.  

Most importantly, avoid misleading potential residents as this will lead to disappointment or can result in attracting the wrong potential tenants. It’s best not to include your garage or unfinished square footage in the total number when you list the property. 

We recommend that you also clearly describe any particularities or things that might end up surprising someone when they see the property in person. Including this information upfront will help you avoid showing the property to potential residents who may be turned off by something omitted in the listing. Good residents will appreciate clear, honest communication and an accurate representation of the property. 

How to use square footage to price your rental property 

The square footage of your property is a critical factor in determining the rental price. While demand, amenities, location, and other factors specific to the property will influence rental pricing, square footage can be a useful starting point in determining the rental price of your property. 

To use square footage as a starting point for pricing your rental property, compare the rent prices of local rentals with similar square footage and the number of bedrooms and bathrooms. You can also determine the rental price using a per-square-footage basis formula. What’s your price per square foot, and is that consistent with similar properties in the area? In densely populated or popular locations, you can expect a higher rental price per square foot than in suburban or rural locations (but other amenities may also influence rental pricing). 

Pricing your rental property is a challenge, and while square footage can aid you in determining the right price, it’s only one factor. 

Pricing your rental property is easy with Belong 

If you’re looking for support in pricing your rental property, look no further. Belong combines current market data with real-time insights into the demand for similar properties in the local rental market. We use first-class technology to determine the right price for your home, including what high-quality, long-term residents are prepared to pay right now. 

As a result, you experience fewer vacancies, good people who care for your home, and profitable rental income. On average, belong has 66% fewer vacancies on our platform, and we help residents find the right home within 19 days. 

Belong is simplifying the rental experience across the US and helping more homeowners reach their financial goals with the most hassle-free property management service; BelongPro.

Square footage is essential to pricing your rental property. Learn the guidelines that dictate how you should calculate square footage for your rental home.

How to Calculate Square Footage For Your Rental Listing

Predicting the annual cost of home maintenance on your rental property will allow you to plan for expenses and ensure that there are fewer surprises in store.

How to Predict a Property’s Annual Cost of Maintenance

Predicting the annual cost of home maintenance will allow you to plan for expenses and ensure that there are fewer surprises in the future. Maintenance is critical because it prevents more expensive repairs and replacements down the line. 

If you are unfamiliar with your property, you should begin by inspecting any major appliances and house systems, including your heating and cooling units, insulation, roof, and hot water heater. It’s also helpful to understand the current state of your electrical, water, and sewer systems. If you recently purchased the property and had a professional inspection, you can find much of this information in their report.

Factors that impact the annual cost of maintenance

Your annual maintenance costs will vary depending on the current age and condition of the property. It’s common for a single-family home to require more maintenance than a condo or apartment that may have an HOA. In some cases, the HOA may be responsible for some maintenance. If this is the case, be sure you are familiar with any fees or costs associated with their maintenance. 

The location of your rental property will also impact the annual maintenance cost. You can expect more maintenance for homes in very cold climates (consistently below 20 degrees) or if you receive significant snowfall. Similarly, homes in humid climates or areas that receive lots of rain will likely need additional maintenance to combat mold and mildew. Frequent rain can also impact the roof and require more frequent siding repair or tree removal.

Carefully consider all of these factors as you calculate annual maintenance costs and plan for expenses. 

The Annual Maintenance Checklist for Rental Homes in California

The Annual Maintenance Checklist for Rental Homes in Florida

The Annual Maintenance Checklist for Rental Homes in Washington State

How to estimate rental property maintenance

Several calculations can help homeowners predict their maintenance costs. Keep in mind that these formulas should be used only as an estimate.

The 50% maintenance rule suggests that homeowners should allocate half of their rental income, or mortgage, for repairs, maintenance, taxes, and insurance. If you already know your tax and insurance costs, you can quickly determine what remaining amount to attribute to maintenance costs. We recommend using this calculation against one of the other formulas to verify your estimate.  

You can also use the square footage of your home as an indicator of your annual maintenance costs. If you use this rule, you should start by estimating $1 per square foot for yearly maintenance costs. If you have a 2,000-square-foot house, your annual maintenance estimate would be $2,000. This estimate may not include yard maintenance, tree removal or care, or snow removal. Likewise, this rule does not account for significant repairs that may be needed. 

If you use the 1% maintenance rule, you will plan that maintenance costs for the year will equal 1% of the property value. For example, if your home is valued at $500,000, your annual maintenance costs will be $5,000. If you use the 1% rule to estimate your maintenance expenses, keep in mind that it does not include any major repairs or replacements. 

The 1% rule can be a helpful maintenance cost indicator because as home values increase and inflation continues to rise, you can expect maintenance costs to increase. While we’ve been using the 1% rule for some time, it’s wise to consider saving closer to 2-5% of your property value, depending on your property’s age, condition, and location. 

Average costs of common rental property maintenance

To accurately predict your annual maintenance cost, you should use a combination of calculations. Consider using a formula and comparing it against the actual costs of routine maintenance. 

Routine maintenance costs (every few weeks or months)

Routine maintenance costs should include any expenses you expect to incur on a regular or semi-regular basis. Keep in mind that some maintenance may only be seasonal. You may need to plan for yard maintenance in the summer and snow removal in the winter. 

You should expect homes to require minor repairs on a semi-regular basis. Things break, and you’ll be less frustrated if you have planned for these repairs, even if you can’t plan which things might need repairs. If you can make these minor repairs yourself, you’ll likely save money on annual maintenance. Likewise, a responsive, reliable handyperson can save you many headaches and additional costs. 

Leaky faucets or toilets: $150-$400/each 

Appliance repairs - washer/dryer, refrigerator: $100-$400/each 

Major maintenance and replacement costs 

Major repairs and maintenance costs can be extremely expensive and cause homeowners significant difficulty. Almost all homeowners will experience a considerable maintenance cost at some point. However, if you assess the current state of your home systems and appliances, you’ll better understand which expenses might arise in the future. As you evaluate your home, you can keep these costs under consideration. 

Sewer line or septic tank replacements: $5,000-$15,000

After you’ve evaluated the current condition of your home, you can plan for additional expenses that are likely to occur in the future. For example, if your hot water heater is ten years old, it’s prudent to begin setting aside money for a replacement. 

Every system in your home has an expected life expectancy. With regular maintenance, you can extend the life of these systems. However, these things will ultimately need to be repaired or replaced. You can expect the exterior paint on a home to last anywhere from four to six years. HVAC systems can last 10-20 years, depending on the climate. The AC may need to be replaced sooner in warmer climates where the system runs more frequently. A traditional water heater has a lifespan of 8-12 years, and a tankless water heater will last 20-25 years. 

The roof of your home is one of the most expensive items to replace. Each type of roof will last for a different duration. It’s critical to familiarize yourself with the kind of roof you have and its current condition. Roofs will generally remain in good condition for 12-25 years. 

Many of us are now spending more time at home, and many may still work from home, either part-time or full-time. As a result, you can expect more wear and tear on a home. 

Jordan Newsom

Jordan Newsom is a highly-caffeinated writer who loves delighting readers, using content to teach, and broadening perspectives. When she's not behind a computer screen, she's hunting down the best coffee shops, breweries, and restaurant patios in Denver, Colorado.

Andrea Vale

Dom Difurio

Jane Allison Gunn

Ale, Owen & Tyler Founders

Sparsh Mehta

Andrea Vale

Dom Difurio

Jane Allison Gunn

Ale, Owen & Tyler Founders

Sparsh Mehta