How to Underwrite a Multifamily Deal

Multifamily is the most-traded institutional asset class, and the underwriting is well-trodden — which is exactly why the edges (real expenses, reserves, exit cap, financing constraints) are where deals are won or lost. Here's the playbook, top to bottom.

1. Build gross potential rent from the rent roll

Start with the rent roll: every unit, its type, and its in-place rent. Sum the annualized contract rents to get in-place gross rent, then decide whether to mark to market — if comparable units lease for more than in-place, the gap (loss-to-lease) is upside you can underwrite if the comps support it. Add other income: utility reimbursements (RUBS), parking, pet rent, fees, laundry. The total is gross potential rent (GPR).

Be disciplined about market rent. The single most common multifamily overstatement is an aggressive mark-to-market with no comp support. Underwrite the rent you can defend.

2. Vacancy and credit loss → effective gross income

No property collects 100% of GPR. Subtract:

• Physical vacancy — units that sit empty. Use the submarket's real vacancy, not a stylized 5%.
• Credit / collection loss — rent billed but never collected.
• Concessions — free-rent or move-in incentives, common in lease-up.

What's left is effective gross income (EGI) — the income the property actually realizes.

3. Operating expenses and reserves → NOI

Build operating expenses from real line items, not a ratio:

• Property taxes (model reassessment on sale — often the biggest single line and the most-missed jump),
• insurance, property management (typically a % of EGI),
• payroll, utilities, repairs & maintenance, turnover, marketing, administrative.

Then subtract a replacement reserve — capital set aside for roofs, systems, appliances, and unit turns. Brokers frequently present NOI before reserves; that flatters every downstream metric. Underwrite to post-reserves NOI — see operating reserves. The result is your net operating income, the engine for valuation, cap rate, and DSCR.

A quick sanity check: a built-up expense schedule on a stabilized property usually lands somewhere around 35–50% of EGI. If yours is dramatically lower, you've probably missed taxes-on-reassessment or reserves.

4. Pick a strategy: stabilized vs value-add

• Stabilized / core: the property already operates at market. Returns come from in-place yield, contractual rent growth, modest expense control, and the exit. Lower risk, lower IRR, steadier cash flow.
• Value-add: you're buying an NOI lift. Model it as two states — as-is operations and post-renovation stabilized operations — with an explicit renovation budget, downtime during turns, and a rent premium your comps support. The returns are the lift you execute, not an assumed mark-to-market. Be honest about the renovation pace and the premium; this is where value-add pro formas overpromise.

5. Exit cap and the sale

Value at sale = forward NOI ÷ exit cap rate. Two disciplines:

• Be conservative on the exit cap. Assume it's at least as high as your going-in cap. You don't control where rates are at sale, and modeling cap-rate compression to manufacture returns is a bet, not a base case.
• Net the sale — subtract selling costs and the outstanding loan balance to get net proceeds to equity.

Then stress it: push the exit cap up 50–100 bps and watch the IRR. If the deal only works at a tighter exit cap, you're underwriting hope.

6. Financing and returns

• DSCR sizes the loan. Compute DSCR = NOI ÷ annual debt service; most lenders want ~1.20–1.25x, and that often caps proceeds before LTV does. Check it at both the interest-only and amortizing scenarios. (DSCR calculator.)
• Returns: build the equity cash-flow stream — initial equity out, annual cash flow after debt service, net sale proceeds at exit — and compute IRR and equity multiple together. IRR for annualized speed, the multiple for total dollars. (IRR calculator.) For syndications, run the LP/GP waterfall so the headline return reflects what the LP actually nets.

Putting it together

A clean multifamily underwrite reads: rent roll → GPR → (− vacancy/credit/concessions) → EGI → (− real opex − reserves) → NOI → exit value at a conservative cap → DSCR-sized debt → LP IRR and equity multiple, stress-tested on vacancy and exit cap. Every number traces to a defensible input.

UpsideIQ runs this entire multifamily cascade — real expense schedule, pre/post-reserves NOI, DSCR at both scenarios, LP IRR via the waterfall — and grades it against your own criteria. Check your assumptions with the free cap-rate, DSCR, and IRR calculators.

Related teardown: Why I passed on a “6.5% cap” multifamily deal that was really a 4.9% — the broker pro forma taken apart line by line.