Guide · Multifamily underwriting
How to underwrite a multifamily deal.
The complete pass, in the order an underwriting model actually runs: documents in, revenue and expenses normalized, NOI, debt, the hold, the waterfall, and the returns — with a 120-unit example carried through every step.
12-minute read · by the team at Nivora
Underwriting a multifamily deal means answering one question with discipline: if we buy this property at this price, with this debt, what return does the equity actually earn? Everything below is in service of that — building a pro forma you can defend line by line, from the rent roll to the LP's IRR.
The worked example throughout: a 120-unit property at $18.0M ($150k per unit), 65% leverage, five-year hold. The numbers stay consistent from step to step so you can see how each assumption flows through the whole model.
01Gather the documents
Three documents drive everything: the rent roll (a unit-by-unit snapshot of every lease — rent, status, move-in and expiration dates), the T-12 (the trailing-twelve-months operating statement showing what the property actually collected and spent, month by month), and the offering memorandum for context on the story, the unit mix, and the submarket.
Reconcile before you model. The rent roll's total scheduled rent should tie to the T-12's rental income line within a few percent; if it doesn't, find out why before going further — concessions, delinquency, or a stale rent roll all change the deal. And treat the OM's pro forma as marketing: the seller's numbers are the starting point for questions, never the inputs.
02Build the revenue picture
Start from gross potential rent — every unit at market rent, fully occupied — then walk down to what the property actually collects. The two deductions that matter: loss to lease (in-place rents below market, recovered only as leases roll) and vacancy (physical plus economic — use the submarket's stabilized rate, not the seller's best month). Then add other income: fees, laundry, parking, pet rent, utility reimbursements.
Example — revenue build-up (year 1)
That bottom line is effective gross income, and it is the base for everything downstream — including the management fee, which is why building it correctly matters twice.
03Normalize the expenses
The T-12 tells you what the seller spent; underwriting asks what you will spend. Go line by line: keep the operating history where it's credible (utilities, contract services), and replace it where ownership changes the number. The three lines that change most:
- Property taxes — most jurisdictions reassess at sale. Underwrite on your price and the local millage, not the seller's assessed value. In the example: about $216,000 (1.2% of the $18.0M purchase).
- Management fee — a percentage of collected income, typically 2.5–4% of EGI. Here: 3% × $2,000,400 ≈ $60,000.
- Insurance — get a quote; trailing premiums rarely survive a sale, and in some states they have doubled in two years.
Convention note: replacement reserves (commonly $250 per unit per year) sit below NOI in most institutional models but inside expenses in some lender models. Either is fine — just be consistent, and know which one a quoted cap rate implies.
04NOI and the going-in cap rate
Example — from EGI to NOI (year 1)
Net operating income is the property's earnings before debt and capital items, and the going-in cap rate — year-one NOI over purchase price — is its price tag: $1,100,400 ÷ $18,000,000 ≈ 6.1%. Compare it to recent trades in the submarket. A purchase below the market cap rate needs a story (true upside you can execute); above it, ask what the market knows that you don't.
05Size the debt
The loan is sized by whichever constraint binds first: loan-to-value (typically 60–70% for agency debt) or DSCR — NOI over annual debt service, with lenders generally requiring at least 1.20–1.25×.
In the example: 65% LTV puts the loan at $11.7M. At a 6.25% rate with 30-year amortization, annual debt service runs about $864,000 — so DSCR is $1,100,400 ÷ $864,000 ≈ 1.27×. The LTV constraint binds, the coverage clears, and the equity check is $6.3M plus closing costs and any capital budget. If DSCR had come in under 1.25×, the loan shrinks until it clears — which is how a debt market quietly reprices a deal the seller still thinks is worth asking.
Watch the interest-only trap: an IO period boosts early cash-on-cash, but coverage is quoted on the amortizing payment. Model both, and check the DSCR again at the exit refinance if your plan depends on one.
06Project the hold and the exit
Now run the operating model forward — month by month, not annual shortcuts: rents grow (2–3% is a defensible stabilized assumption; double-digit submarket growth is not a plan), expenses inflate, loss to lease burns off as leases roll, and any renovation program phases in unit by unit with its own downtime.
The exit is its own underwrite. Apply an exit cap rate to the year after sale's NOI — and underwrite it at or above your going-in cap, because betting on multiple expansion is timing, not skill. In the example: NOI growing ~3% a year reaches about $1.28M by year six; at a 6.5% exit cap the sale is roughly $19.6M, less ~2% selling costs, less the loan balance. Most of the equity's profit arrives in that single cash flow, which is exactly why the exit cap deserves the most skepticism of any assumption in the model.
07Run the equity waterfall
Project-level returns aren't what the LP earns. Distributions flow through the waterfall: preferred equity (if any) gets its coupon first, then LPs earn their preferred return (commonly 7–9%), then the sponsor's promote kicks in — for example 80/20 above an 8% IRR hurdle, stepping to 70/30 above 14%.
Two discipline checks. First, the waterfall must reconcile: every tier's distributions, summed, must equal levered cash flow to the dollar — by construction, not by a plug. Second, look at the GP/LP split of total profit at the base case and one downside case; a structure that pays the sponsor well in scenarios where the LP loses money will not survive diligence.
New to the structure? Read the equity waterfall, explained — the whole mechanism with the numbers worked through.
08Read the returns — then stress them
Three numbers summarize the deal, and they discipline each other: IRR (time-weighted — rewards getting capital back sooner), equity multiple (total cash out over cash in — indifferent to timing), and cash-on-cash (annual distributions over invested equity — what the hold feels like year to year). A high IRR with a thin multiple is a quick flip; a fat multiple with a low IRR is patience priced in. Value-add deals in a normal market tend to pencil in the mid-teens IRR with a 1.8–2.2× multiple over five years.
Then stress everything. Build a sensitivity grid — exit cap on one axis, rent growth on the other, with each cell a full re-run of the model — and find where the deal breaks: the exit cap that pushes IRR below the pref, the vacancy that breaks 1.0× DSCR. If the base case sits one notch from a cliff, the market is telling you the price already assumes your upside.
Common mistakes that sink underwriting
Underwriting the broker’s pro forma
The OM’s pro forma is a sales document. Start from the actual rent roll and trailing twelve months, and treat every OM assumption as a claim to verify, not an input.
Keeping the seller’s property taxes
Most jurisdictions reassess at sale. Underwrite taxes on your purchase price and the local millage — on a value-add deal this single line can erase a year of rent growth.
Management fee on the wrong base
Management fees are quoted as a percentage of collected income (EGI), not gross potential rent. Computing it on GPR overstates the expense; forgetting it understates every ratio downstream.
An exit cap rate below the going-in cap
Assuming the market pays a richer multiple in five years is a bet on timing, not on the asset. Underwrite the exit cap at or above the going-in cap and let the deal earn its return from operations.
Quoting DSCR off interest-only payments
An IO period flatters coverage. Lenders size to the amortizing payment — quote both, and know which one the term sheet means.
Skipping the sensitivity table
A single-scenario model tells you what you hoped. A grid of exit cap × rent growth tells you where the deal breaks — and whether the base case sits near a cliff.
Glossary — the terms that matter
Frequently asked questions
What documents do you need to underwrite a multifamily deal?
At minimum a current rent roll and a trailing-twelve-month (T-12) operating statement. The rent roll gives you in-place rents, unit mix, occupancy, and lease expirations; the T-12 gives you the actual income and expense history. Useful additions are the last three months of statements (a T-3 to check the run-rate), the offering memorandum, property-tax records, and any capital-expenditure history. Underwriting starts by reconciling the rent roll against the T-12 — the two should tell the same story.
How do you calculate NOI when underwriting a property?
NOI = effective gross income − operating expenses. Build effective gross income from the rent roll (gross potential rent, less vacancy, loss to lease, concessions, and bad debt, plus other income), then subtract normalized operating expenses: property taxes reassessed on your purchase price, a market management fee, insurance, utilities, payroll, and repairs. NOI is measured before debt service, capital expenditures, and income taxes, so it reflects the property’s operating profit independent of how it is financed.
Should you use a going-in or an exit cap rate?
Both, for different jobs. The going-in cap rate is first-year NOI divided by the purchase price — a check on what you are paying today. The exit cap rate is applied to the sale-year NOI to estimate the resale price, and it is the single most important exit assumption. Underwrite the exit cap at or above the going-in cap — typically 25–50 basis points higher — so you are not baking in cap-rate compression you cannot control.
How much debt can a multifamily deal support?
The loan is sized by the more binding of two tests: loan-to-value (a percentage of purchase price or appraised value, often 65–75%) and the debt-service-coverage ratio (net cash flow divided by the annual mortgage payment, which lenders hold near 1.20–1.25×). Whichever test produces the smaller loan governs. On thin-coverage deals DSCR binds; on high-value, low-yield deals LTV binds.
What DSCR do multifamily lenders require?
Most stabilized multifamily loans require a debt-service-coverage ratio of roughly 1.20–1.25×, meaning net cash flow (NOI after replacement reserves) covers the mortgage payment 1.20–1.25 times over. Agency and lower-leverage loans can demand more; bridge lenders sizing to a future stabilized number sometimes accept less at closing. Coverage below 1.0× means the property does not cover its own debt.
How do you model the exit on a multifamily deal?
Project NOI to your sale year — usually a five- to ten-year hold — divide it by the exit cap rate for a gross sale price, then subtract selling costs (typically 1–3%) and the outstanding loan balance to reach net proceeds to equity. Those proceeds, plus the interim cash flows, are what the IRR and equity multiple are computed on. The exit assumption frequently drives more of the return than operations do, so stress it.
What is an equity waterfall and how does it split the cash?
A waterfall is the agreed order in which a deal’s cash is split between the limited partners (investors) and the general partner (sponsor). Cash typically returns invested capital and a preferred return to the LPs first, then the sponsor earns a “promote” — an outsized share above each return hurdle. A common structure pays an 8% preferred return, then splits profits 80/20, 70/30, and so on as higher IRR hurdles are cleared.
What are the most common multifamily underwriting mistakes?
Carrying the seller’s property taxes forward instead of reassessing on your purchase price; omitting a market management fee when the owner self-manages; trusting the rent roll’s asking rents without a lease-trade or comp check; assuming exit-cap compression; and burying capital expenditures inside operating expenses so NOI looks higher than it is. Each one flatters NOI or the exit, and every downstream metric multiplies the error.
Or skip the template entirely.
Everything on this page is what Nivora runs the moment you upload a rent roll and T-12 — revenue reconciled against the statement, taxes reassessed, debt sized, the waterfall reconciled to the penny, and the sensitivity grid re-running the full model in every cell.
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