How to Read a Short-Term Rental Pro Forma

What a pro forma is, and what it is not

A pro forma is a forecast of a rental's income and costs for a typical year, built from assumptions rather than a record of what happened.

That distinction matters. A trailing profit and loss statement shows what a property actually earned. A pro forma shows what someone expects it to earn, and the person who prepared it usually wants you to buy. Neither is dishonest by nature, but the pro forma deserves more questions.

Most short-term rental pro formas follow the same shape:

1. Income: nightly rate times booked nights, plus cleaning fees charged to guests.
2. Operating costs: cleaning, platform fees, management, utilities, supplies, repairs, insurance, property tax and a reserve.
3. Net operating income (NOI): income minus operating costs, before the loan.
4. Debt service: the yearly mortgage payment.
5. Cash flow and returns: what is left after the loan, and ratios such as cap rate, cash-on-cash return and debt service coverage.

Read it in that order. A mistake near the top flows through every line below it.

The income lines

The income section rests on two inputs, average nightly rate and occupancy, and almost every inflated pro forma inflates one of them.

Nightly rate. Ask whether it is the average across the year or the rate in a good month. A group home that books $600 a night over a holiday weekend may average far less once you include winter weeknights.

Occupancy. This is the share of the year's nights that are booked. A high figure with no source is the biggest single red flag on a pro forma. Ask for the actual booking calendar if the home is already rented, and compare with similar homes nearby.

Booked nights and stays. Occupancy times 365 gives booked nights. Divide by the average stay length to get the number of stays, which drives cleaning income and cleaning cost. A pro forma that shows high occupancy but very few stays has probably assumed long stays, which lowers cleaning costs on paper.

Cleaning fees. These are income from guests, but each stay also has a cleaning cost. Check both lines are there and use the same number of stays.

The operating cost lines

Operating costs are where a pro forma most often looks better than reality, usually because a line is low or missing altogether.

Go through each one:

• Cleaning cost per stay. Should rise with bedrooms. Check it against a quote from a local cleaner.
• Platform fees. Airbnb's help page says most hosts on the split fee pay 3%, while most hosts on the host-only fee pay 15.5%, and that the host-only fee is mandatory for most hosts, including those who use property management software. If the pro forma uses 3% but the home will be run through management software, the fee line is too low.
• Management. Even if you plan to self-manage, put in a fee or a value for your time. A pro forma with no management line assumes you work for free. Our guide to vacation rental management fees covers how fees are usually structured.
• Utilities and internet. Guests run the air conditioning, heat, pool and hot tub. Ask for the actual bills.
• Supplies. Linens, toiletries, paper goods, coffee and replacements for what breaks.
• Repairs and maintenance. A group home sees heavy use. A very low figure is a sign the seller is counting on nothing going wrong.
• Insurance. A short-term rental usually needs a different policy than a standard homeowner's policy. Get your own quote rather than using the seller's number.
• Property tax. Many counties reassess after a sale, so last year's bill may be lower than yours will be.
• Licenses, permits and local taxes. Some cities charge permit fees and lodging taxes. See short-term rental permits.
• Reserve for replacements. Furniture, appliances, mattresses and the roof all wear out. A pro forma with no reserve treats them as free.

IRS Publication 527 makes a useful distinction here: repairs can generally be deducted, but you must capitalize expenses that improve the property. For the pro forma, that means a new roof belongs in the reserve, not in ordinary repairs.

A worked Example: the seller's sheet against yours

The quickest way to see what a pro forma hides is to rebuild it line by line next to the original.

Same house, same nightly rate. The difference is four assumptions: occupancy, the platform fee, management and the reserve, plus a tax bill that reflects a sale. Each one is defensible on its own. Together they cut the NOI by more than two thirds.

Now add the loan. Say the yearly mortgage payment is $20,000. On the seller's sheet, cash flow is $60,640. On the adjusted sheet it is $3,372, and the debt service coverage ratio is about 1.17, below the 1.25 our deal analyzer uses as its benchmark for most DSCR lenders. If the buyer put in $112,500 down, $12,000 in closing costs and $40,000 in furniture, that $3,372 is a cash-on-cash return of about 2%.

Red flags to look for

Most weak pro formas share a handful of patterns, and you can spot them in a few minutes once you know where to look.

Depreciation deserves a note. IRS Publication 527 lists residential rental property as depreciated over 27.5 years under the general system. Depreciation can lower taxable income, but no cash changes hands, so it should sit in a separate tax section and never raise the cash flow line. Tax treatment of short-term rentals has its own rules, which our short-term rental tax loophole guide explains; ask a CPA before relying on any tax figure.

What to verify before you offer

Before you make an offer, turn each assumption into a document or a quote you got yourself.

1. Actual results. If the home is already a rental, ask for 12 to 24 months of payout statements and the booking calendar, not a summary.
2. Comparable homes. Check rate and occupancy for listings with the same bedroom count in the same area across a full year.
3. Bills. Ask for utility, internet and pool service bills.
4. Insurance. Get your own quote for a short-term rental policy.
5. Property tax. Ask the county how the assessment will change after a sale.
6. Rules. Confirm the city and any homeowners association allow short-term rentals, and what permits and taxes apply.
7. Loan. Get the actual rate and payment from your lender, and ask how it calculates income for a DSCR loan. Our DSCR loans guide explains the ratio.
8. Startup costs. Price the furniture, supplies and photos you will need.

Then run your adjusted numbers through the deal analyzer, which adds the loan, the slow months and a stress test, and check the ratios with the cap rate calculator and the DSCR calculator. If you want the full method, our step-by-step guide to analyzing a short-term rental deal covers it, and cap rate vs cash-on-cash return explains which ratio answers which question.

The bottom line

Read a short-term rental pro forma from the top: question the nightly rate and occupancy first, then check every cost line is present and realistic, and keep depreciation out of cash flow. Rebuild the sheet with your own documents and quotes, run it through a calculator, and test it at lower occupancy. All our free tools are on the investor tools page. If you are interested in investing with JekkyStay, see our investors page.

This is general information, not tax, legal or investment advice.