Skip to main contentSkip to navigationSkip to footer

Pro Forma Case Study: 20-Unit Apartment Building

8 min
5/6

Key Takeaways

  • The 20-unit pro forma validates: GPR $240K, 5% vacancy, EGI $230,220, OpEx $90K, NOI $140,220.
  • Year 1 metrics: Cap Rate 7.01%, Cash-on-Cash 11.1%, DSCR 1.46x, BTCF $44,220.
  • Over 5 years with 2% rent growth and 3% expense growth, the equity multiple reaches 2.34x with an IRR near 22%.
  • Every pro forma assumption should be individually validated against market data before committing capital.

This lesson brings together all the concepts and formulas from the previous lessons into a complete, integrated pro forma for our 20-unit apartment building. We will walk through the full analysis from acquisition assumptions through Year 5 disposition, validating every calculation and demonstrating how the metrics interrelate. This is the reference case study you will return to throughout the remainder of this AOS.

Acquisition Assumptions

Purchase price: $2,000,000. Financing: 80% LTV conventional loan at 6.5% interest, 30-year amortization, yielding a $1,600,000 loan with annual debt service of approximately $96,000 ($8,000/month). Down payment: $400,000. Closing costs: approximately $25,000 (title, legal, appraisal, lender fees). Total cash at closing: $425,000. The property is a 1985-built, 20-unit garden-style apartment complex with all two-bedroom/one-bathroom units at 850 square feet each. Current rents average $1,000/month, in line with market comps for the submarket.

Why it matters: Understanding this concept is essential for making informed investment decisions.

Year 1 Pro Forma: Full Validation

Gross Potential Rent: 20 units × $1,000/month × 12 months = $240,000. Vacancy and Credit Loss at 5%: $240,000 × 0.05 = $12,000. Other Income (laundry $720, parking $900, late fees/misc $600): $2,220. Effective Gross Income: $240,000 − $12,000 + $2,220 = $230,220. Operating Expenses: Property taxes $28,800 (assessed at $1.44/$100 on $2M value), Insurance $9,200, Repairs and maintenance $16,000 ($800/unit), Management at 8% of EGI = $18,418 (rounded to $18,400), Utilities $10,600, Administrative $7,000. Total operating expenses: $90,000. Operating Expense Ratio: $90,000 / $230,220 = 39.1%. Net Operating Income: $230,220 − $90,000 = $140,220. Annual Debt Service: $96,000. Before-Tax Cash Flow: $140,220 − $96,000 = $44,220.

Year 1 Validated Summary
GPR: $240,000 Vacancy (5%): −$12,000 Other Income: +$2,220 EGI: $230,220 OpEx: −$90,000 (OER: 39.1%) NOI: $140,220 Debt Service: −$96,000 BTCF: $44,220 Cap Rate: $140,220 / $2,000,000 = 7.01% CoC: $44,220 / $400,000 = 11.1% DSCR: $140,220 / $96,000 = 1.46x

Why it matters: GPR: $240,000 Vacancy (5%): −$12,000 Other Income: +$2,220 EGI: $230,220 OpEx: −$90,000 (OER: 39.1%) NOI: $140,220 Debt Service: −$96,000 BTCF: $44,220 Cap Rate: $140,220 / $2,000,000 = 7.01% CoC: $44,220 / $400,000 = 11.1% DSCR: $140,220 / $96,000 = 1.46x

Five-Year Projection and Exit Analysis

Assumptions: 2% annual rent growth, 3% annual expense growth, vacancy stable at 5%. Year 1 NOI = $140,220. Year 2 NOI = $144,718 (rents grow 2%, expenses grow 3%). Year 3 NOI = $149,335. Year 4 NOI = $154,074. Year 5 NOI = $158,939. Exit at end of Year 5 using a 7.25% cap rate on Year 6 forward NOI ($163,935): Sale price = $163,935 / 0.0725 = $2,261,172. Selling costs at 2% = $45,223. Remaining loan balance approximately $1,528,000. Net sale proceeds = $2,261,172 − $45,223 − $1,528,000 = $687,949. Five-year equity multiple = (total BTCF $248,037 + net sale proceeds $687,949) / $400,000 = 2.34x. The IRR of approximately 22% confirms this is a strong acquisition at the stated price and terms.

Pro Forma Red Flags: 7 Signs the Seller Is Inflating Numbers
1. **Vacancy below 3%**: Even the best-managed properties experience 5%+ economic vacancy. A 0% vacancy assumption is fiction. 2. **Expenses below 35% of EGI**: For multifamily, operating expenses typically run 40-55% of EGI. If the seller shows 25-30%, expenses are being hidden or deferred. 3. **No management fee**: Even self-managed properties should budget 6-10% for management. Lenders require it, and you will eventually hire a manager. 4. **Property taxes based on current (pre-sale) assessment**: Many jurisdictions reassess at sale price. Budget for post-acquisition tax increase (often 20-50%+ increase). 5. **Rent growth above 5%/year**: Long-term national rent growth averages 3.2% annually (Zillow ZORI, 2024). Projections above 5% require strong local data support. 6. **No capital expenditure reserve**: Budget minimum $250-$500/unit/year for CapEx. Zero CapEx means deferred maintenance is being hidden. 7. **Trailing 3-month annualized income**: Sellers may annualize their best 3 months. Always request 24 months of actual P&L statements (T-24). Rule: NEVER underwrite off the seller's pro forma. Build your own from verified T-12 and T-24 operating statements.
YearGPREGIOpExNOIBTCFDSCR
1$240,000$230,220$90,000$140,220$44,2201.46x
2$244,800$234,780$92,700$142,080$46,0801.48x
3$249,696$239,434$95,481$143,953$47,9531.50x
4$254,690$244,184$98,345$145,839$49,8391.52x
5$259,784$249,031$101,296$147,735$51,7351.54x

5-Year Pro Forma Summary (2% rent growth, 3% expense growth)

Source: Revitalize Curriculum Example

Why it matters: 1. **Vacancy below 3%**: Even the best-managed properties experience 5%+ economic vacancy. A 0% vacancy assumption is fiction. 2. **Expenses below 35% of EGI**: For multifamily, operating expenses typically run 40-55% of EGI. If the seller shows 25-30%, expenses are being hidden or deferred. 3. **No management fee**: Even self-managed properties should budget 6-10% for management. Lenders require it, and you will eventually hire a manager. 4. **Property taxes based on current (pre-sale) assessment**: Many jurisdictions reassess at sale price. Budget for post-acquisition tax increase (often 20-50%+ increase). 5. **Rent growth above 5%/year**: Long-term national rent growth averages 3.2% annually (Zillow ZORI, 2024). Projections above 5% require strong local data support. 6. **No capital expenditure reserve**: Budget minimum $250-$500/unit/year for CapEx. Zero CapEx means deferred maintenance is being hidden. 7. **Trailing 3-month annualized income**: Sellers may annualize their best 3 months. Always request 24 months of actual P&L statements (T-24). Rule: NEVER underwrite off the seller's pro forma. Build your own from verified T-12 and T-24 operating statements.

Key Takeaways

  • ✓The 20-unit pro forma validates: GPR $240K, 5% vacancy, EGI $230,220, OpEx $90K, NOI $140,220.
  • ✓Year 1 metrics: Cap Rate 7.01%, Cash-on-Cash 11.1%, DSCR 1.46x, BTCF $44,220.
  • ✓Over 5 years with 2% rent growth and 3% expense growth, the equity multiple reaches 2.34x with an IRR near 22%.
  • ✓Every pro forma assumption should be individually validated against market data before committing capital.

Sources

Common Mistakes to Avoid

Annualizing the best 3 months of income rather than using T-12 or T-24 data

Consequence: Overstates annual revenue by capturing seasonal peaks or one-time income events

Correction: Always request and underwrite from trailing 12-month (T-12) or 24-month (T-24) actual operating statements

Not adjusting property taxes for post-sale reassessment

Consequence: Many jurisdictions reassess at sale price, increasing taxes 20-50% above the seller's current assessment

Correction: Budget property taxes based on the purchase price and local reassessment policies, not the seller's current tax bill

Test Your Knowledge

1.In the 20-unit case study, what is the Year 1 Before-Tax Cash Flow?

2.What exit cap rate was used for the 5-year disposition analysis?

3.Which of these is a red flag in a seller's pro forma?

Previous LessonNext Lesson