How we underwrite a 5-to-50-unit multifamily deal in 30 minutes

When a seller calls about a property, we can usually tell whether there's a deal within half an hour of getting the basics. Address, unit count, current rents. That's most of what we need.

Underwriting at this size isn't complicated. The math is the math. What matters is being honest about the inputs, especially the ones brokers consistently soft-pedal.

This is how we do it.

What we ask for first

Three things, in order:

1. Rent roll, current. Not "scheduled rent" or "market rent." What every tenant is actually paying this month.
2. Trailing 12 months of operating statements (T-12). If you don't have a clean T-12, the year-end accounting from your CPA works.
3. Address, unit count, year built, and a sentence on why you're selling.

We can underwrite without the T-12 if you don't have one. We just plug in our own operating expense ratios and adjust later. We can't underwrite without the rent roll.

How we calculate income

Start with gross potential rent. That's what the building would collect at full occupancy at current rents. Multiply monthly rent roll by 12.

Subtract:

• Vacancy and credit loss. We use 5% in good submarkets, 7% in softer ones. Brokers often use 3% or assume "100% occupied at offering." We don't.
• Concessions if any tenants got a free month or reduced rent.

That gives you effective gross income (EGI). The number we actually expect to collect.

We don't trust "scheduled rent" as a number. If a unit shows $1,800 on the rent roll but the tenant has been paying $1,500 for two years on a verbal arrangement, the rent is $1,500. We'll find that out in due diligence, so we underwrite it that way from the start.

Operating expenses: the hard part

This is where most pro formas lie.

Honest operating expense ratios for B/C class multifamily in our markets:

• Property taxes. Pull the actual amount from the county. Don't trust "assessed value times rate." Most assessors are working off old data, and a sale resets the basis.
• Insurance. $400 to $800 per unit per year for B/C class, varies by region. Tacoma is on the higher end since 2023 because of carrier appetite. Texas is even higher in coastal counties.
• Property management. 6 to 9% of EGI for professional management. Use 8% if the seller is self-managing, because we'll be paying for management.
• Maintenance and repairs. $400 to $800 per unit per year for routine items. Not capex. We treat that separately.
• Utilities. Water, sewer, garbage, common-area electric. Pull actual bills. Subtract RUBS reimbursement if it exists.
• Marketing, admin, legal, misc. $100 to $200 per unit per year.

Total operating expenses for B/C class in our underwriting usually land between 38% and 48% of EGI. Brokers commonly show 28% to 32%. The gap is either understated repairs, missing reserves, or outright fiction.

EGI minus operating expenses equals net operating income (NOI). The most important number on the page. The glossary entry on NOI walks through it in more detail.

Capex reserves: the line most pro formas skip

Buildings need roofs, HVAC, water heaters, paint, flooring, parking lot resurfacing, plumbing repairs. They need this whether you collect rent or not. A 1972 building that hasn't had work in fifteen years is going to need $20,000 to $40,000 per unit over the next decade.

We reserve $300 to $500 per unit per year for ongoing capex, on top of routine maintenance. Pre-1970 buildings or known deferred-maintenance situations: more.

Subtract capex reserves from NOI. That's the cash flow we actually plan around. The capex reserve glossary entry explains the logic.

What is the cap rate, really?

Cap rate is NOI divided by purchase price. Brokers will tell you the cap rate of a listing using their inflated NOI. We compute it using our underwritten NOI, which is usually 15-30% lower.

So a deal a broker calls a "6.5% cap" lands in our model as a 5.0% cap. That's not a rounding error. It's the difference between a deal that pencils and a deal that doesn't.

When we make an offer, the cap rate target depends on the market:

• Tacoma stabilized B-class: closer to 5.5 to 6.0%.
• Wichita value-add: usually 7.0 to 8.5%.
• Houston B/C class: lands in the middle, depending on submarket.

The glossary entry on cap rate covers the framework.

How does debt service fit in?

If the deal is going to be financed, NOI minus debt service equals cash flow. Lenders usually want a debt service coverage ratio (DSCR) of at least 1.20 for stabilized properties, 1.30+ for value-add.

For seller-financed deals, the math is simpler. The seller financing page covers how we structure those. The seller becomes the bank, the property is the collateral, monthly payments come from operating cash flow.

The 30-minute version

Putting it together, this is what runs through Jose's head when a seller is on the phone:

1. Effective gross income from the rent roll, with realistic vacancy.
2. Operating expenses at 38 to 48% of EGI, sanity-checked against the T-12.
3. NOI = EGI minus opex.
4. Capex reserve subtracted to get true cash flow.
5. Cap rate target by market.
6. Offer price = NOI divided by target cap rate.

Six steps. Most of the time we can do this on a yellow pad while the seller describes the property. If the numbers work, we send a written offer in a few business days. If they don't, we say so on the same call.

If you want to walk through your own property's numbers, tell me about it. Even if we don't end up buying, you'll get an honest read on what it's worth. To see what we look for in each market, the Washington, Texas, and Kansas pages cover submarkets, criteria, and recent activity.