The Multifamily Deal That Cash-Flows on Paper but Won't Get Financed

On paper this one looked easy. A stabilized 40-unit multifamily asset, asking $4.2M, with $252,000 of net operating income — a clean 6.0% cap rate in a market where that's a fair print. The broker's flyer showed positive leverage and a healthy return. So why did the deal fall apart at the lender? Because the cap rate and the loan are two different tests, and this deal only passed the first one.

Run the financing. At 70% loan-to-value, that's a $2.94M loan. At a 6.5% rate on a 30-year amortization, annual debt service is roughly $223,000. Divide the $252,000 NOI by that debt service and you get a debt-service-coverage ratio of about 1.13x. Most agency and bank lenders on multifamily want to see 1.25x, often higher in a choppy rate environment. At 1.13x, this loan doesn't get approved at 70% LTV.

So the lender does what lenders do: they size the loan to the coverage, not the price. To hit 1.25x against $252,000 of NOI, the maximum debt service is about $201,600 — which at the same rate and amortization supports a loan closer to $2.66M, not $2.94M. The deal is now debt-service-constrained, not LTV-constrained.

That gap has to be filled with equity. You're writing a bigger check than you planned, your leverage is lower than you underwrote, and your cash-on-cash return drops accordingly. The 6.0% cap rate didn't change — the deal just stopped working, because the number that actually gated it was never on the flyer.

The lesson: in a higher-rate environment, deals get sized on coverage long before they get sized on value. A cap rate tells you what the asset yields unlevered; it tells you nothing about whether the capital stack you need will actually close. Underwrite the loan in the same breath as the price — run the DSCR at the rate and amortization you'll actually get, and find out early whether you're LTV-constrained or coverage-constrained. The deals that surprise people at the closing table are almost always the ones where nobody checked coverage until the lender did.

Run your own numbers in the DSCR calculator and the cap rate calculator. For the full mechanics, see how to underwrite a multifamily deal.