How to Underwrite a Multifamily Deal
To underwrite a multifamily acquisition, start with the T-12 actuals, verify the rent roll, adjust for realistic pro forma assumptions (rent growth, vacancy, expense inflation), size debt against stabilized DSCR, and stress-test exit cap rate movement.
Before you start
Multifamily underwriting is 80% skepticism of the seller's story and 20% math. Work in this order.
What you need
- T-12 (last twelve months)
- Current rent roll
- Market rent comparables
- Property condition assessment
- Insurance bindable quote
- Property tax reassessment analysis
Steps
- Step 01
Start with T-12 actuals
Read the T-12 line by line. Revenue: GPR, vacancy loss, concessions, bad debt, other income. Expenses: property taxes, insurance, utilities (landlord-paid), R&M, payroll, management fee, contract services, replacement reserves. Compute actual NOI from actuals.
- Step 02
Normalize expenses for post-sale reality
Apply post-transfer property tax reassessment (huge variable — some states reassess on transfer). Use bindable insurance quote (not seller's current policy). Add management fee at market (3-5%) if owner-managed. Add replacement reserves at $200-350 per unit.
- Step 03
Build a realistic pro forma
Apply achievable rent growth (compare to submarket data, not national averages). Stabilize vacancy at submarket average (typically 4-8%). Inflate expenses at 3-4% annually. Apply specific capex for known deferred maintenance.
- Step 04
Size debt against stabilized metrics
Calculate debt proceeds at target leverage (agency: up to 75-80%; CMBS: 65-75%). Size based on stabilized DSCR (agency: 1.25x minimum; stress-tested at higher rates). Check debt yield (agency: 8-10% minimum).
- Step 05
Model leverage returns
Project year-one NOI after stabilization, annual debt service, year-one cash flow. Calculate cash-on-cash return on your equity at closing. Project NOI growth, appreciation, and exit.
- Step 06
Stress-test exit cap movement
Apply three exit cap scenarios: base (going-in cap), stress (+50 bps), extreme stress (+100 bps). Compute IRR and equity multiple under each. A deal that only works at tight exit cap assumptions has thin margin.
- Step 07
Verify capex and reserve assumptions
Commission a property condition assessment. Size renovation budget with 15-20% contingency. Confirm your reserve for capex and lease-up is adequate — most bridge-to-agency multifamily failures trace to underfunded reserves.
- Step 08
Sanity-check basis and comparables
Compare your all-in basis per unit and per SF against: recent market sales, replacement cost, and nearby Class A new construction. Buying meaningfully above replacement cost is an above-basis bet on rent growth you should be able to articulate specifically.
Common mistakes
- Underwriting to pro forma rents without evidence they're achievable in the submarket
- Missing post-sale property tax reassessment
- Using seller's current insurance premium instead of bindable market quote
- Underestimating capex and replacement reserves
- Aggressive exit cap assumptions (flat or compressed)
- Ignoring concession exposure and true economic occupancy
Frequently asked questions
What's the single most important underwriting input?
Exit cap rate. It drives the lion's share of IRR and is the easiest to get wrong. A modest change in exit cap swings hold-period returns dramatically. Always stress-test.
How long should a multifamily underwrite take?
A first-pass screen takes 60-90 minutes. A serious underwrite takes 4-8 hours including market research, pro forma modeling, and scenario analysis. Deal-specific diligence (property condition, environmental, legal) adds more.
When should I walk away during underwriting?
When the deal only works on best-case assumptions. If realistic rent growth, moderate vacancy, normal expenses, and a slightly-wider exit cap don't produce acceptable IRR, the deal is too thin.