How to Underwrite a Small Multifamily Deal: Under 20 Units

Small multifamily financing requires attention to both the property and the borrower or guarantor. Loan programs differ. Ask the lender what records, coverage calculations and borrower qualifications it will use before assuming the deal can be financed.

A smaller building can give you a manageable example to work through, but the analysis still needs property records, realistic expenses and lender input. This walkthrough follows a 12-unit scenario.

Start with the rent roll, not the asking price

Request the rent roll early, then compare it with the signed leases and payment records. The asking price and the rent roll both need support.

A rent roll reports units, tenants, lease dates and rent amounts. Verify actual collections separately against payment records. Read it for three things:

• Units below market. That is upside, if the leases roll over soon.
• Units above market. That is risk, because the rent may not renew at that level.
• Vacancies and month-to-month tenants. Both change your income assumption.

If reading one still feels slow, fix that before you write an offer. How to read a rent roll (with real examples) walks the format line by line.

Build the income number the property actually earns

State the rent basis first. If you start with market rents, account for differences from signed lease rents and any concessions. Keep vacancy and collection losses separate and avoid counting the same deduction twice. Small buildings may also have laundry, parking, storage or utility-reimbursement income. Support each line with the applicable agreements and collection records.

Subtract vacancy and credit loss. Some units sit empty and some tenants pay late or not at all. A submarket vacancy figure gives you a working number to hold back.

What remains is effective gross income. Label the result as actual or projected, depending on the income and loss assumptions you used.

Turn income into NOI

Subtract operating expenses such as taxes, insurance, utilities, management and repairs to calculate NOI. Keep debt service and capital outlays separate. Track replacement reserves separately as well, and check how the lender adjusts its underwriting calculation.

Effective gross income minus operating expenses is net operating income, or NOI. NOI is the number the whole deal turns on. Understanding NOI covers why one wrong line here moves the value by six figures.

Rebuild the expense estimate from the property’s trailing-twelve operating statement. Look for costs the current owner may not have recorded, such as outside management, and get support for assumptions about taxes, insurance and future work.

Run the two returns that matter

With NOI in hand, review both the property-level measure and the cash needed for the purchase.

Cap rate is annual NOI divided by price. It is an unleveraged operating-income ratio, not total annual return. Financing, capital outlays, transaction costs, investor taxes and appreciation sit outside that ratio. Compare properties using consistent assumptions.

Cash-on-cash is annual pre-tax cash flow divided by the cash you actually put in. It is the number your investor client feels in their bank account. A simple cash-on-cash framework breaks the calculation down step by step.

Pressure-test the debt before you celebrate

A healthy cap rate can still be a dead deal once the loan is on it. This is where most first-timers get surprised.

DSCR compares underwritten income with annual debt service. Using NOI of $84,000 and annual debt service of $82,000 gives about 1.02 before lender adjustments. Lenders may define underwritten income differently and apply other property, borrower, and loan-program requirements. Ask the lender to review the assumptions and available options.

A worked example: a 12 unit deal

For this hypothetical example, assume a 12-unit building priced at $1,350,000. Twelve units at $1,100 a month produce $158,400 in gross potential rent. A 5% vacancy allowance leaves $150,480 in effective gross income. Assumed operating expenses of $66,480 leave $84,000 in NOI.

At the $1,350,000 asking price, that is about a 6.22% cap rate. That number alone does not establish whether the purchase fits the investor.

Now assume annual debt service of $82,000. This is an input for the example, not a lender quote or a payment derived from stated loan terms. DSCR is $84,000 ÷ $82,000, or about 1.0244 before any lender adjustments. That leaves $2,000 before capital reserves, further capital spending and taxes.

A lower price or more cash may change the analysis, but neither guarantees loan approval. Ask the lender to review the property, borrower and proposed terms.

A quick underwriting checklist

Before you take a small multifamily deal seriously, confirm you have:

• The actual rent roll and the trailing-twelve operating statement, not a pro forma.
• NOI you rebuilt yourself, including management, with reserves and capital spending tracked separately.
• Cap rate at the asking price, and the price where the cap rate makes sense to you.
• A DSCR illustration using identified assumptions, with the financing questions still requiring lender review.

The three numbers to bring the seller

When you call the listing agent, lead with what you can defend: your NOI, the cap rate that NOI implies at their price, and the DSCR under the stated loan assumptions. Show the records and assumptions behind the numbers, and ask where the seller’s analysis differs.

Keep revising the analysis as you receive better records, cost estimates and financing terms.

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