How to Underwrite a Multifamily Deal

Why Underwriting Matters

Underwriting is the foundation of every multifamily investment decision. It is the process of building a financial model that projects how a property will perform over your intended hold period. Institutional buyers, lenders, and equity partners all rely on the underwriting to determine whether a deal makes economic sense.

A well-built underwriting model answers three fundamental questions: What is the property worth today? What will it be worth at disposition? And what returns can investors expect along the way? Getting these answers right requires disciplined assumptions rooted in market data, not optimism.

Step 1: Analyze the Rent Roll

The rent roll is your starting point. It tells you exactly what the property is earning today on a unit-by-unit basis. For each unit, examine the current contract rent, the market rent for that unit type, the lease expiration date, and occupancy status.

Calculate the gross potential rent (GPR) by assuming every unit is leased at market rent. Then compare it to the in-place rent to identify the loss-to-lease, which represents the revenue upside available without any capital improvements.

Pay close attention to concessions, month-to-month tenants, and units rented significantly below market. These are indicators of either management inefficiency or deferred maintenance that may create opportunity or risk depending on your business plan.

Step 2: Build Revenue Projections

Your Year 1 revenue projection starts with the in-place rent roll and layers on assumptions for vacancy, concessions, bad debt, and other income. A stabilized multifamily property in a strong market might run at 5 to 7 percent economic vacancy. Value-add deals with active renovation programs may see higher vacancy during transition.

Other income includes items like pet fees, parking, laundry, storage, utility reimbursements (RUBS), and late fees. These revenue streams can add $50 to $150 per unit per month and are often undermanaged at acquisition, making them a reliable source of upside in a value-add business plan.

Step 3: Underwrite Operating Expenses

Request the trailing 12-month (T12) operating statement from the seller and compare each line item against market benchmarks. The major expense categories include property taxes, insurance, utilities, repairs and maintenance, property management fees, payroll, administrative costs, and contract services.

Institutional underwriters typically express expenses on a per-unit basis to facilitate comparison across properties. For example, if total operating expenses are $600,000 on a 100-unit building, the per-unit expense is $6,000 per year.

Be cautious of seller-managed properties where management fees or payroll may be understated. Always underwrite third-party management at the market rate, typically 4 to 6 percent of effective gross income, regardless of the seller's current arrangement.

Step 4: Calculate Net Operating Income

Net Operating Income (NOI) is the single most important number in multifamily underwriting. It equals Effective Gross Income minus Total Operating Expenses. NOI drives the property valuation, loan sizing, and return calculations.

Always calculate NOI for multiple scenarios: in-place (current operations), stabilized (after executing your business plan), and pro forma (projected for each year of the hold period). Lenders will focus on in-place or Year 1 NOI for debt sizing, while equity investors care most about the stabilized and exit NOI.

Step 5: Size the Debt and Model Returns

With NOI established, you can determine how much debt the property supports. Lenders size loans using two constraints: Loan-to-Value (LTV), typically 65 to 80 percent, and Debt Service Coverage Ratio (DSCR), typically 1.20x to 1.35x. The binding constraint determines maximum loan proceeds.

From there, calculate the equity required (purchase price plus closing costs plus renovation budget minus loan proceeds) and model the annual cash flows after debt service. Key return metrics include Cash-on-Cash Return (annual cash flow divided by equity invested), Internal Rate of Return (IRR), and Equity Multiple (total distributions divided by total equity).

A well-underwritten value-add multifamily deal typically targets a leveraged IRR in the mid-teens, a 1.7x to 2.2x equity multiple over a 3 to 5 year hold, and Year 1 cash-on-cash returns of 4 to 7 percent with growth into the double digits by stabilization.