If you’ve ever looked at a deal that promised sky-high returns but didn’t quite “feel right” — you were probably looking at Phantom NOI in action.
Phantom NOI refers to inflated income numbers in pro forma projections — typically based on aggressive, unrealistic assumptions that ignore current performance. It’s one of the biggest traps passive investors fall into and one of the most common ways deals go sideways.
Let’s break it down.
💸 Where Phantom NOI Shows Up
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Rent growth forecasts at 5–7% annually (when the market is growing at 2%)
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Occupancy magically increasing to 97% immediately after takeover
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Expenses shown as a flat number, not tied to actual percentages
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Ignored turnover, vacancy loss, or CapEx needs
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Omitting realistic bad debt and property tax reassessments
When these projections make it into offering memorandums or investor decks, the deal looks fantastic on paper — but performs far worse in reality.
📊 Why This Is So Dangerous
Phantom NOI inflates valuation, especially when used to justify price per door. A seller may claim, “This property has $800K in NOI,” when in reality, it’s generating $600K. If you pay based on the inflated number, your true cap rate is lower than expected, and your cash flow suffers from day one.
Phantom NOI leads to:
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Missed returns and broken investor promises
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Refinancing delays due to underperformance
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Increased capital calls to make up for missing income
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Reputation damage for syndicators and operators
🔎 How to Spot It
1. Ask for the T-12 (Trailing 12-Month Financials)
This is your truth source. Don’t rely on Year 1 pro forma income — see what the property actually earned in the past year.
2. Compare to Market Rents Honestly
Is the deal assuming a $400 rent bump? That’s fine — but only if you’ve verified the comps, floorplans, finish levels, and tenant base.
3. Analyze the Expense Ratio
If the OM says 25% of income goes to expenses, and the market average is 38%, you’ve got a problem.
4. Confirm Property Taxes
If the county reassesses post-sale, your tax bill may jump 40%. Underwrite accordingly.
✅ What to Do Instead
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Underwrite based on actual income and expenses — not broker-provided projections.
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Add margin of safety: use 10–15% vacancy, higher expenses, conservative rent growth.
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Model CapEx, turnover costs, and leasing timelines.
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Ask, “If nothing improves, will this still cash flow?”
If the answer is no, it’s not a good deal — it’s a pitch.
💼 Final Thought
Don’t fall in love with the pro forma. Fall in love with disciplined underwriting.
Phantom NOI looks great on paper, but it doesn’t pay the bills.
The best investors know how to separate hype from reality — and they invest accordingly.
