I recently had a call with a potential investor. They mentioned coming across a property with an advertised cap rate of 7%. “Isn’t that a really good cap rate these days?” they wondered, and they asked me for my thoughts.
Is it a good cap rate? Well, that depends — it depends on the specific market, the property type and condition, and the investor’s risk tolerance, among other things. High cap rates typically signal higher risk.
The first thing I asked them was where the property was located. The second — was it the actual cap rate or a pro forma?
They double-checked. It was a pro-forma, they confirmed.
Their follow-up question: Why does it matter?
That is a great question, but first —
What is a Pro Forma?
A pro forma in real estate is a forward-looking financial projection that estimates a property’s future income, expenses, cash flow, and returns. It’s basically a financial forecast for how the property is expected to perform once it’s in run-state. Think of it as a model of the property’s likely future, as opposed to its actual current performance.
So - Where’s the risk?
Relying on pro forma cap rates and projected income is risky because pro formas reflect expected performance, not current reality. The pro forma is only as good as the assumptions behind it. Assumptions about rent growth, occupancy, and expenses from the Seller’s agent are oftentimes optimistic, masking operational weaknesses and inflating asset value. Pro formas can also ignore market volatility, unforeseen capital needs, and realistic lease-up timelines.
For example, if you have a currently vacant property with deferred maintenance, a pro-forma will show what returns might look like once the property has been renovated and in run-state. A pro forma can give investors a rough idea of what to expect in the future, but investors should prioritize actual trailing financials, stress-test assumptions, and validate market conditions.
So, while pro formas are ONE of the many inputs we take into account while evaluating the properties that come across our desks, we don’t rely on pro formas to produce favorable returns for our investors. We always apply a disciplined framework and exercise rigorous due diligence to identify, acquire, manage, and successfully exit properties across the US. Our focus during acquisitions is on current performance, with an eye on projected returns and opportunities to drive long-term outcomes. Grounding valuations in verified performance—not best-case scenarios—provides clearer risk assessment and helps prevent overpaying for underperforming assets.
BENA Capital has built a sustained track record for over a decade — delivering reliable returns across both residential and commercial acquisition strategies. Our company has navigated multiple full cycles, including the historic COVID-19 pandemic.
Since 2015, BENA Capital has delivered over $790,000 of quarterly cash flow to our investors over 47 consecutive quarters of distributions.
That’s proven performance.