How to Read a Pro Forma: The 8 Numbers That Actually Matter

January 2026

Pro formas contain a large amount of information, but not all of it is equally useful for evaluating risk and return. For passive investors, the goal is not to audit a spreadsheet or validate every assumption, but to understand which inputs actually drive outcomes and where risk is concentrated.

This article explains how LPs should read a pro forma and the eight numbers that typically matter most when evaluating a real estate syndication.

What a Pro Forma Is – and What It Is Not

A pro forma is a projection, not a forecast.

It reflects assumptions about:

• Income growth

• Expenses

• Financing

• Timing and exit

A pro forma does not predict the future. It shows what must happen for projected returns to materialize.

Understanding that distinction is the first step to using a pro forma effectively.

The 8 Numbers That Matter Most

You do not need to analyze every line item. These eight areas usually provide the clearest insight into risk and realism.

1. Entry Price Relative to Current NOI

The purchase price relative to current net operating income establishes the starting point for the deal.

Key questions:

• How does pricing compare to recent transactions in the submarket?

• Is current NOI stable or transitional?

This number anchors valuation assumptions before any business plan execution.

(For valuation context, see Understanding Cap Rates (Without Overcomplicating It).)

2. Rent Growth Assumptions

Rent growth drives much of the upside in many deals.

LPs should assess:

• How rent growth compares to historical submarket trends

• Whether growth assumptions exceed income or job growth

• How much return depends on aggressive increases

Small differences in rent growth assumptions can materially change outcomes.

3. Expense Growth Assumptions

Expenses are often understated.

A realistic pro forma should reflect:

• Property tax reassessment risk

• Insurance and payroll pressure

• Ongoing maintenance and capital needs

Flat or minimal expense growth over long periods often deserves scrutiny.

4. Debt Service Coverage Ratio (DSCR)

DSCR indicates how much margin exists between income and required debt payments.

LPs should focus on:

• DSCR at stabilization, not just at acquisition

• How DSCR behaves under stress scenarios

• Whether coverage provides a meaningful cushion

Thin DSCR leaves little room for error.

(For deeper context, see Financing & Underwriting Basics.)

5. Loan Structure and Interest Rate Exposure

Debt structure matters as much as leverage.

Key considerations include:

• Fixed vs floating rate exposure

• Interest rate caps or hedges

• Loan maturity relative to the business plan

Pro formas that rely on favorable refinancing conditions deserve careful review.

(For rate sensitivity, see How Interest Rates Affect Commercial Real Estate Deals.)

6. Exit Cap Rate Assumption

Exit cap assumptions often have a larger impact on returns than entry pricing.

LPs should ask:

• How does the exit cap compare to current submarket data?

• Is the assumption conservative relative to today’s environment?

• How sensitive returns are to small changes in this assumption?

Exit assumptions should be stress-tested, not optimized.

7. Sources of Return (Cash Flow vs Exit)

Understanding where returns come from is critical.

A healthy pro forma clarifies:

• How much return comes from ongoing cash flow

• How much relies on appreciation at exit

• The role of leverage in amplifying outcomes

Deals that rely heavily on exit value require greater confidence in assumptions.

(Return composition is discussed in How Returns Work in Syndications.)

8. Sensitivity to Missed Assumptions

The most important insight often comes from stress testing.

LPs should consider:

• What happens if rent growth is flat?

• How returns change if exit cap assumptions widen?

• Whether the deal remains viable under less favorable conditions?

A pro forma that only works under ideal assumptions carries higher risk.

How Pro Formas Fit Into Deal Evaluation

Pro formas are tools, not decision-makers.

They should be evaluated alongside:

• Market and asset selection

• Sponsor execution capability

• Financing structure

• Portfolio fit

(For an integrated framework, see How to Compare Multiple Deals Side by Side.)

A Practical Way to Read a Pro Forma

Rather than asking “Are these returns attractive?”, a more useful question is:

“What has to go right for these returns to occur – and how much room is there if they don’t?”

That mindset turns a pro forma from a sales document into an analytical tool.

Final Perspective

You do not need to be a financial modeler to read a pro forma well.

Focusing on a small number of key assumptions and understanding how they interact will often provide more insight than reviewing dozens of projected line items.

For passive investors, the goal is not precision – it is judgment.

Note: This material is for educational purposes only and is not intended as tax, legal, or investment advice. Investors should consult appropriate professionals regarding their specific circumstances.

Continue Learning

This article is part of a broader learning series on passive real estate investing.

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: GP-LP Alignment Explained: Fees, Co-Invest, Waterfalls