Pro Forma NOI vs Actual NOI: Checking the Numbers a Seller Hands You

Pro forma NOI in real estate is a projection of what a property could earn. Actual NOI is what it did earn, on real books, over a real twelve months. A listing almost always hands you the first one and calls it the income. Buying on that figure without rebuilding it is the most common way a deal goes wrong on paper long before it goes wrong in person.

This guide shows how to test a seller’s number, what stabilized and adjusted NOI mean, and where income leaks out between the rent roll and the bottom line. If you want the definition first, what NOI is and what it leaves out covers the basics.

What proforma NOI is in real estate

A pro forma is a forecast statement. It puts market rent on every unit, picks a vacancy allowance, and lists the expenses the seller chose to show. None of that is dishonest by itself. Projections are how anyone prices future income. The trouble is that a pro forma rarely labels which lines are history and which are hope.

Here is the site’s default property, built honestly. A $500,000 house rents for $4,000 a month, so gross scheduled income is $48,000. Allow 5% for vacancy and effective gross income is $45,600. Property taxes are $6,000, insurance is $2,500, and 18% of collected income ($8,208) covers maintenance, capital reserves and management. Operating expenses total $16,708 and NOI is $28,892, or $2,407.67 a month. Against the $500,000 price that is a 5.78% cap rate.

Now the listing version of the same house. All $48,000 collected, because the tenant has never missed. No management fee, because the seller self-manages. No reserve line. Repairs at 5% of rent, or $2,400. Expenses come to $10,900 and NOI to $37,100, a 7.42% cap rate. Same roof, same tenant, $8,208 of difference.

Where pro forma rent and vacancy assumptions come from

Ask two questions about every rent on the sheet: is it in a signed lease, and when does that lease end? Market rent on a unit with a tenant two years into a below-market lease is not income you will collect next month. It is income you might collect after a turnover, a repaint and an empty stretch.

Vacancy is the other soft spot. Plenty of pro formas use 3% or even zero on a single-family rental, on the theory that one tenant means no vacancy. One tenant actually means all-or-nothing vacancy. Lenders and appraisers normally underwrite around 5% on a house in a steady market and more where turnover runs fast. The right number is whatever local rent surveys and the property’s own leasing history support, and it belongs in writing.

Trailing 12, trailing 3 and in-place NOI

There are three views of actual performance, and sellers quote whichever one flatters the property.

Trailing 12 is the last twelve months of collected income and paid expenses. It is the baseline, because it covers a full accounting period and includes the slow season, the turnover and the furnace repair.

Trailing 3 annualized takes the last quarter and multiplies by four. That is fair after a real change, such as a finished renovation, and misleading right after a rent bump or a quiet winter with no repairs.

In-place NOI uses today’s signed rents with normal expenses. On the default house, suppose the current lease is $3,700 instead of $4,000. Gross scheduled income is $44,400, effective gross income is $42,180 at 5% vacancy, and 18% of that is $7,592. With the same $6,000 of taxes and $2,500 of insurance, expenses are $16,092 and in-place NOI is $26,088, a 5.22% cap rate at the $500,000 price.

So one house produces three defensible numbers: $26,088 in place, $28,892 at market, $37,100 on the seller’s pro forma. Ask which one a quoted cap rate used before you compare it to anything else.

The five line items most often understated

• Management, 8% of collected income. Underwrite it even if you plan to self-manage, because a buyer or lender will.
• Capital reserves, around 5%. A roof and a water heater are not free just because they did not break last year.
• Vacancy and bad debt. Zero vacancy is not a figure, it is an omission.
• Property taxes. Many counties reassess on sale, so the seller’s bill may not be yours. Check the assessor’s rate against your purchase price.
• Insurance. Use a current quote in your name, not a premium the seller locked in years ago.

Adjusted NOI, annual NOI and NOI leakage

Adjusted NOI is actual NOI with one-time items normalized out: a storm repair the insurer reimbursed, a legal bill from an eviction, an owner’s truck payment run through the books, or thirteen tax payments landing inside one year. Adjust in both directions and show every change on the income statement you build, so the seller can argue with specific lines instead of the total.

Watch the accounting basis too. Cash books count money when it moves, while accrual books count it when it is earned. A property can look stronger on accrual because billed but unpaid rent still shows up as income. NOI is always an annual figure, and monthly NOI is that year divided by twelve, which is what the monthly or annual question sorts out.

NOI leakage is the distance between gross scheduled income and what reaches the bottom line: concessions, unpaid balances, unbilled utilities, fees nobody charges, renewals signed late at the old rate. On the default house, every 1% of collected income that leaks is about $456 of NOI.

Stabilized NOI and NOI growth

Stabilized NOI is what a property earns once rents are at market, occupancy is normal for the submarket and expenses have settled. A property gets there when the leases have rolled, usually one to two full lease cycles after a repositioning. Before that point, stabilized NOI is a forecast and should be labeled as one.

The honest way to use it is to show both ends and the cost of crossing between them. Moving the default house from $26,088 in place to $28,892 stabilized is $2,804 of NOI growth, worth roughly $43,000 of value at a 6.5% cap rate. Then subtract the turnover, the repaint and the empty month, and put a date on when the lease even allows the raise.

Rebuilding the seller’s number from scratch

1. Take rents from the leases, not the listing.
2. Add other income only where there is a billing record.
3. Apply a vacancy and credit loss allowance you can support.
4. Rebuild expenses line by line with your own quotes, following the NOI formula step by step.
5. Add management and reserves back in if they are missing.
6. Compare your NOI to the asking price for a cap rate, then to the pro forma to size the gap.

If your number lands 15% or 20% under the sheet, that does not make it a bad deal. It makes it a different deal, priced on what the property does today.

Run both numbers

Build the in-place version first, then the stabilized version, in the NOI Calculator on the home page. Two statements side by side turn an argument about a seller’s projection into a list of specific lines, which is a much easier conversation to win.