Pro Forma vs. Reality: Why LA Rentals Underperform Their Spreadsheets

For Investors · Last updated: May 2026 · 6 min read

Every real estate deal starts with a pro forma — a spreadsheet that projects rental income, expenses, and returns over a 5-10 year hold. The pro forma is what your broker emails you. It's what your lender uses. It's what makes the deal look like a good idea.

And in LA, it's almost always wrong. Not maliciously wrong. Just systematically optimistic in the same five places, every time. Investors who don't adjust the inputs end up holding properties that "should have" delivered 12% IRR but actually deliver 6%.

This article walks through the five most common gaps between pro forma and reality in LA multifamily — and how to underwrite them honestly.

The five common pro forma traps

Line item	Typical pro forma	LA reality	Gap
Vacancy	3-5%	5-8% blended	2-3 percentage points
Maintenance / R&M	$300-500/unit/yr	$700-1,200/unit/yr	2-3x
Property tax growth	Prop 13 (2%)	Reassessed at sale = jump 30-100%+	Massive on first year
Capex / reserves	$150/unit/yr	$400-700/unit/yr	3-4x
Rent growth	3-4%/yr blended	RSO caps at 3-4%, vacancy decontrol limited	0.5-1.5 points lower

Each of these on its own would shave 1-2% off the IRR. Stacked together on the same property, they can take a "13% IRR deal" down to 6-8%.

Trap 1. Vacancy: the broker said 3% but LA averages closer to 6%

Brokers and sponsors love to quote "stabilized vacancy" of 3-5%. The number sounds reasonable. It's also wrong for most LA properties when you measure honestly.

Real vacancy in LA breaks down like this:

• Physical vacancy (unit literally empty): 2-4% averaged over a year
• Lease-up downtime (between tenants): 2-3% (typically 21-28 days between tenants)
• Collection loss (rent owed but unpaid): 1-2%
• Bad debt write-offs (eviction recovery): 0.5-1%

Total real vacancy: 5.5-10%, with 6-7% being a reasonable LA average for stabilized residential.

For RSO-controlled properties, real vacancy can be even higher in years where evictions are pursued — eviction processes in LA routinely take 4-9 months during which the unit is occupied but generating no income. Pro formas almost never model this.

Trap 2. Maintenance and repairs: $300/unit/year is a fantasy

A 60-year-old LA building does not run on $300/unit/year. Here's what realistic maintenance actually costs:

• Routine response (plumbing, electrical, appliance, locksmith): $400-700/unit/yr depending on building age
• Tenant turnover make-readies: $1,500-3,500 per turnover (paint, deep clean, minor repairs). Spread across the building, this is $400-800/unit/yr
• Annual servicing (HVAC, pest, landscaping, gutters, common-area maintenance): $200-400/unit/yr

Total realistic R&M for a typical LA building: $1,000-1,900/unit/yr, depending on building age and condition. A pro forma that shows $300-500/unit is either modeling a brand-new building or hasn't been validated against actual operations.

Trap 3. Property taxes: the Prop 13 reset

This one is the most predictable and the most often missed by out-of-state investors. California's Proposition 13 limits property tax growth to 2%/year — but only while the same owner holds the property. When the property sells, the tax basis resets to the new purchase price.

Example: A building purchased in 1992 for $1.5M is now assessed at maybe $2.4M (1.5M growing at 2% for 30+ years). At a 1.25% effective tax rate, current property taxes are about $30K/year.

You buy the same building today for $5M. Your tax basis resets to $5M. Your new property tax bill: $62.5K/year — more than double.

If the seller's pro forma showed the OLD tax bill ($30K), and you didn't catch it, you've just lost $32K/year — call it 0.5% of your purchase price gone every year. Over a 5-year hold, that's $160K in cash flow you never realized.

Trap 4. Capex reserves: the silent killer

Capital expenditures (capex) are big-ticket items that don't fit into annual maintenance — roof replacements, plumbing repipes, electrical panel upgrades, HVAC system replacements, exterior painting cycles, parking lot resurfacing.

For LA buildings, here are realistic capex life cycles and replacement costs:

Item	Useful life	Replacement cost	Annualized / unit
Roof	20-25 yrs	$15-30K (typical building)	$60-100
Exterior paint	7-10 yrs	$15-40K	$150-250
HVAC (per unit)	15 yrs	$4-8K/unit	$300-500
Water heaters	10-12 yrs	$1.5-2.5K/unit	$150-200
Plumbing repipe	40-50 yrs	$50-100K (building)	$100-200
Electrical panel	30-40 yrs	$15-30K	$50-80
Parking lot resurface	8-12 yrs	$10-25K	$100-200

Add it up: $900-1,500/unit/year in proper capex reserves. Most pro formas show $150-300. The difference doesn't go away — it just shows up as a surprise expense in year 4 when the roof needs replacing.

Trap 5. Rent growth: RSO and AB 1482 cap your upside

A pro forma that assumes 4% annual rent growth in a stable LA market is optimistic. A pro forma that assumes 4% rent growth on an RSO-controlled property is impossible — by law.

The reality:

• RSO properties (pre-October 1978 multifamily, ~640,000 units in LA City): rent increases capped at the lower of CPI or 4% annually (with some adjustments in recent years). Vacancy decontrol allows reset to market on turnover — but only when a unit turns. With 5-7 year average tenant tenure, this happens slowly.
• AB 1482 properties (most non-RSO rentals over 15 years old): increases capped at 5% + CPI, max 10%/year statewide.
• Brand new buildings (15 years or less old): exempt from AB 1482, can raise freely — but rents already start at market.

A realistic blended rent growth assumption for an LA value-add multifamily deal: 2.5-3.5% blended annually, with most of the growth coming from vacancy resets, not in-place rent increases. Pro formas showing 5%+ rent growth on RSO properties should be treated as fiction.

How to stress-test a pro forma in 15 minutes

If you're handed a pro forma, here's the quick gut check:

1. Vacancy: Add 2 points to whatever the pro forma shows. If they have 3%, model it at 5%.
2. R&M: If under $700/unit/yr, double it.
3. Property tax: Recalculate at the NEW purchase price × 1.25% (LA effective tax rate). Replace their number.
4. Capex reserves: Use $700-1,000/unit/yr minimum.
5. Rent growth: If RSO, cap at 3% blended. If non-RSO AB1482, cap at 4% blended. Anything higher needs justification.

Then re-run the IRR. If the deal still pencils — it might be real. If it doesn't pencil after this adjustment, walk away. The sponsor's projection was an optimistic case, not a realistic one.

What good sponsors do differently

The best sponsors we know underwrite to the downside, then show the upside as the optimistic case. Specifically:

• They build the pro forma with REAL operating data from the seller (T-12 or T-24 statements)
• They model property tax at the NEW basis from day one
• They include a separate capex line item with at least $600/unit/yr reserves
• They run sensitivity tables — "What if exit cap rate is 50bps higher?" "What if rent growth is 2% not 4%?"
• They show three scenarios: bear case (realistic with conservative assumptions), base case (likely), bull case (optimistic) — and the deal makes sense in all three

If a sponsor only shows you one number, you're looking at marketing material, not underwriting.

FAQs

Should I trust the seller's actuals more than the sponsor's pro forma?

Generally yes — the seller's last 12-24 months of operating data is the most reliable starting point. But it's not perfect: sellers often defer maintenance heading into a sale (which makes their expenses look low). Adjust upward by 10-20% on R&M for the "deferred maintenance correction."

How do I know if a building is RSO?

If it's in LA City, has 2+ units, and was built before October 1, 1978, it's almost certainly RSO. The LA Housing Department has a public lookup tool. Single-family rentals and most condos are exempt.

What's a "reasonable" target IRR for LA multifamily?

For value-add stabilized deals: 12-15% target, 9-11% realistic after honest underwriting. For core stabilized deals: 8-10% target, 6-8% realistic. Anything projected above 18% has aggressive assumptions buried somewhere — find them before investing.

Can I see real operating data on a Bessa-managed property?

Yes, with NDA. We're happy to share anonymized operating data from similar buildings to help investors stress-test deals they're considering — whether or not the deal is one of ours.

The bottom line

Pro formas exist to make deals look attractive. That's not a moral failing — it's how the industry works. Your job as an investor is to apply a correction factor that turns the marketing pitch into a realistic model.

For LA multifamily in 2026, those corrections are well-known and consistent. Use them, and you'll either find deals that pencil honestly (rare and worth pursuing) or you'll save yourself from buying something that was always going to underperform.