Most pro formas fail in the same way: they count rent and mortgage, and treat everything else as rounding.
The full expense list
Below the line items everyone includes:
- Vacancy — 5–8% of gross rent in a normal market. Not zero, even with a great tenant, because turnover eventually happens.
- Maintenance — 5–10% of rent, higher on older properties
- Capital expenditure reserve — the one most often omitted. Roof, HVAC, water heater, flooring, appliances all have finite lives. Budget 5–10% of rent.
- Property management — 8–10% of collected rent plus a leasing fee. Include it even if self-managing; your time has value and you may not always want the job.
- Turnover — make-ready, cleaning, paint, marketing. Assume every 2–3 years.
- Landlord insurance — more expensive than a homeowner policy
- Legal and accounting
- Utilities the landlord covers, plus vacant-period utilities
These commonly total 35–45% of gross rent before debt service.
A realistic example
$300,000 property, 25% down, $225,000 loan at 7.25%, rent $2,400/month.
| Gross annual rent | $28,800 |
| Vacancy at 6% | −$1,728 |
| Effective income | $27,072 |
| Property tax | −$3,600 |
| Insurance | −$1,800 |
| Maintenance 7% | −$2,016 |
| CapEx reserve 7% | −$2,016 |
| Management 9% | −$2,436 |
| Net operating income | $15,204 |
| Debt service | −$18,420 |
| Cash flow | −$3,216 |
Negative. A naive analysis — rent minus mortgage, tax and insurance — would have shown roughly +$4,800 and called it a good deal.
The metrics worth calculating
- Cap rate = NOI ÷ price. Here 5.07%. Useful for comparing properties independent of financing.
- Cash-on-cash = annual cash flow ÷ cash invested. Here negative.
- DSCR = gross rent ÷ PITIA. Determines financeability.
- Total return — cash flow plus principal paydown plus appreciation. Often positive even when cash flow is not, which is a legitimate strategy but a different one.
Where the numbers come from
- Rent — actual comparable listings, not the seller’s claim. The appraiser’s Form 1007 is the lender’s view.
- Taxes — the county site, at your purchase price, not the current owner’s assessment
- Insurance — an actual quote, not an estimate. Coastal and wildfire pricing has moved sharply.
- Maintenance — inspection report plus the age of major systems
The discipline that matters
Run the numbers before you fall in love with the property, and use assumptions you would defend to a sceptic. A deal that only works at 0% vacancy and no capex is not a deal — it is a bet on nothing going wrong for a decade.
Common questions
For a single-family rental, 35–45% of gross rent covering everything except debt service is a realistic planning figure.
No. Total return combines cash flow, principal paydown, appreciation and tax treatment. But cash flow is what keeps you solvent while the rest accrues.
General information, not advice on your specific situation. Guidelines, limits and pricing change, and vary by lender, programme and state. Nothing here is a commitment to lend or an offer of credit. For tax or legal questions, consult a qualified professional.
Sree Basireddy · Mortgage Loan Officer, NMLS 2705737 · Loan Factory, Inc., NMLS 320841 · Equal Housing Opportunity