Multifamily underwriting is the process of evaluating an apartment property's financial performance to determine whether it meets your investment criteria. It involves analyzing income, expenses, debt coverage, and market conditions to calculate expected returns and assess risk.
What is multifamily underwriting?
Multifamily underwriting is the analytical process used by investors, lenders, and acquisition teams to determine whether an apartment property is worth buying or financing. It starts with raw documents from the seller and ends with a complete financial model showing projected cash flows, returns, and risk.
The term "underwriting" comes from lending: before a bank funds a loan, it must underwrite the risk. Equity investors apply the same logic. Before committing capital, you underwrite the deal to confirm that the property's income can support the debt, the expenses are realistic, and the returns justify the risk relative to alternatives.
Multifamily underwriting differs from other asset classes because it combines tenant-level analysis (unit mix, in-place rents, lease expirations) with property-level financials (operating expenses, capital reserves) and market-level analysis (comparable rents, vacancy trends, cap rate movement). All three layers must hold up for a deal to pencil.
The 7 steps of multifamily underwriting
Experienced underwriters follow a consistent sequence. Each step builds on the last.
Collect and verify source documents
Request the offering memorandum, current rent roll (dated within 30 days), trailing 12-month operating statement (T12), property tax bills, and utility bills. The rent roll and T12 are non-negotiable. Do not underwrite from pro forma numbers in the OM alone.
Key question: Does the OM pro forma match the T12 actuals? If not, why?
Build the income schedule
Start with Gross Potential Rent (GPR): every unit at market rent, 100% occupied. Then apply vacancy and credit loss (typically 5 to 10% for stabilized multifamily), concessions, and any non-rental income (parking, laundry, storage, pet fees) to arrive at Effective Gross Income (EGI).
Formula: EGI = GPR − Vacancy Loss − Credit Loss + Other Income
Underwrite operating expenses
Review the T12 line by line. Common expense categories include property management (typically 4 to 8% of EGI), payroll, repairs and maintenance, insurance, property taxes, utilities, and marketing. Per the NAA Income/Expense benchmarks, total operating expenses averaged approximately $8,657 per unit in 2024. Do not simply accept the seller's reported expenses.
Red flag: Expense ratios below 35% on a market-rate property almost always indicate missing line items.
Calculate Net Operating Income (NOI)
NOI = EGI − Operating Expenses. This is the core output of underwriting. NOI excludes debt service, depreciation, income taxes, and capital expenditures. You will use NOI to calculate the value (via cap rate), size the debt (via DSCR), and measure returns.
Calculate both in-place NOI (current rents) and stabilized NOI (market rents, normalized vacancy) separately.
Determine value and debt capacity
Value = Stabilized NOI / Market Cap Rate. Then size the debt: most agency lenders (Fannie Mae, Freddie Mac) require a minimum 1.25x DSCR and a maximum 80% LTV. Run both tests: the property must pass both to support the loan amount you need.
When debt sizing, use the lender's stressed interest rate, not today's spot rate.
Model the hold period and exit
Build a 5 to 10-year cash flow projection with annual rent growth assumptions, expense growth (typically 2 to 3% annually), and a capital expenditure reserve (commonly $200 to $400 per unit per year for stabilized assets). At exit, apply an exit cap rate (typically 25 to 50 basis points above the going-in cap rate) to projected year-of-sale NOI.
Run base, upside, and downside scenarios. A deal that only works in the upside case is not a deal.
Calculate equity returns and make a go/no-go decision
Calculate IRR, equity multiple, and cash-on-cash return for each scenario. Compare against your return hurdles. Most institutional buyers target 12 to 18% levered IRR on value-add deals and 8 to 12% on core-plus. If the deal meets your criteria in the base case, it is ready for investment committee.
Document your key assumptions so any reviewer can trace every number back to its source.
Key metrics in multifamily analysis
Every metric below has a specific formula and an expected range. Use these as a starting screen: any metric outside the normal range warrants a detailed explanation before you proceed.
| Metric | Formula | Target Range / Notes |
|---|---|---|
| Gross Potential Rent (GPR) | Total Units × Market Rent | Maximum possible income at 100% occupancy. Baseline for all income analysis. |
| Vacancy & Credit Loss | GPR × Vacancy % | 5 to 10% for stabilized properties. Below 5% is aggressive. Above 10% requires explanation. |
| Effective Gross Income (EGI) | GPR − Vacancy + Other Income | The true top-line revenue. Always reconcile to T12 collected income. |
| Operating Expense Ratio | Operating Expenses / EGI | 35% to 50% for most market-rate properties. Older buildings skew higher. Source: NAA benchmarks. |
| Net Operating Income (NOI) | EGI − Operating Expenses | Core output. Excludes debt service, depreciation, and CapEx. Drives valuation and debt sizing. |
| Cap Rate (Going-In) | NOI / Purchase Price | Core multifamily averaged 4.73% going-in (Q3 2025). Value-add: 5.5 to 7.0%. Source: CBRE H1 2025 Cap Rate Survey. |
| DSCR | NOI / Annual Debt Service | Agency lenders require 1.25x minimum. Above 1.50x earns better terms. Source: Fannie Mae Multifamily Guide. |
| LTV | Loan Amount / Property Value | Agency multifamily typically allows up to 75 to 80% LTV. Higher LTV requires lower cap rates or stronger DSCR. |
| Cash-on-Cash Return | Annual Pre-Tax Cash Flow / Equity Invested | 4 to 8% year-one CoC is typical for stabilized deals. Value-add may be 0 to 3% in year one with upside over hold period. |
| Equity Multiple | Total Equity Distributions / Equity Invested | 1.6x to 2.2x over a 5-year hold is a typical institutional target for value-add strategies. |
| IRR (Levered) | Discount rate that makes NPV of all equity cash flows = 0 | 12 to 18% for value-add. 8 to 12% for core-plus. Core: 6 to 9%. |
| Price per Unit | Purchase Price / Number of Units | Varies widely by market. Used for quick comparable benchmarking. Always cross-check against cap rate valuation. |
| Loss-to-Lease | (Market Rent − In-Place Rent) / Market Rent | Quantifies rent upside. Positive loss-to-lease means current tenants pay below market. Key input for value-add underwriting. |
| CapEx Reserve | Per-unit annual reserve (not expensed) | $200 to $400/unit/year for stabilized assets. Value-add renovation budgets are underwritten separately as a lump sum. |
Sources: CBRE H1 2025 Cap Rate Survey, Fannie Mae Multifamily Guide, NAA Income/Expense benchmarks, industry standard ranges.
Tax note: Depreciation on multifamily
Under IRS Publication 527, residential rental property (including multifamily buildings where 80% or more of gross rents are from dwelling units) is depreciated over 27.5 years using the straight-line method at a 3.636% annual rate. This depreciation is excluded from NOI but is a significant tax benefit that affects after-tax equity returns. Include it in your equity return analysis but keep it out of the operating model.
What documents do you need for multifamily underwriting?
Solid underwriting requires primary source documents, not just broker summaries. The following documents are essential to request before committing to any offer price.
Core underwriting documents
Rent Roll (current, dated within 30 days)
Lists every unit: tenant name, unit type, square footage, lease start and end dates, in-place rent, market rent, vacancy status, and security deposit. This is the foundation of your income analysis. Complete rent roll guide.
T12 Operating Statement (Trailing 12 Months)
Month-by-month actual income and expenses for the past 12 months. This reveals seasonal patterns, unusual expense spikes, and collection trends that a single-year summary hides. Always request T12 and T24 if available. Download T12 template.
Offering Memorandum (OM)
The broker's package: property overview, market summary, pro forma projections. Use the OM for context and market data, but never use OM pro formas as your underwriting inputs. The pro forma assumptions are the seller's best case. Build your own model from the T12 and rent roll.
Property Tax Bills (current and prior year)
Verify the current tax assessed value and total annual tax bill. Be alert to reassessment risk: in many jurisdictions, a sale triggers reassessment at the purchase price. Model your taxes based on the post-acquisition assessed value, not the seller's lower current bill.
Utility Bills (12 months)
Actual bills for electric, gas, water, and sewer. Critical if the property pays any utilities that could be sub-metered or RUBS-billed to tenants. Utility costs declined 3.2% to $1,304 per unit in 2024 per NAA data, but this varies significantly by climate and building age.
Insurance Policy (current declarations page)
Verify current coverage levels and annual premiums. Insurance costs have risen sharply in many markets. Get an independent quote during due diligence, not just the seller's current rate, which may not reflect replacement cost or current market premiums.
Supporting documents (request during due diligence)
- Bank statements (12 months): The ultimate verification of actual rent collected. Cross-check against T12 income figures.
- Service contracts: Landscaping, trash, HVAC maintenance, elevator, pest control. Understand which contracts transfer with the property and at what cost.
- Existing loan documents: If assuming the debt, review the loan agreement for prepayment penalties, assumability fees, recourse provisions, and rate.
- Prior year tax returns (Schedule E): Cross-check income and expense claims against the T12. Sellers sometimes report different numbers to the IRS than they present in the OM.
- Lease agreements for all units: Verify lease terms match the rent roll. Look for unusual concession clauses, early termination rights, or lease-up incentives that will not repeat.
- Property condition assessment (PCA): Third-party report identifying immediate repairs and projected capital needs over 10 to 12 years. Critical input for your CapEx underwriting.
The reconciliation check every underwriter should run
Total scheduled rent from the rent roll × 12 should roughly equal the gross potential rent line on the T12. If there is a gap of more than 5%, investigate: concessions, bad debt, vacant units not shown, or mismatched as-of dates. This single check catches most data quality issues before they flow into your model.
Common mistakes in multifamily underwriting
These are the errors that cause investors to overpay or mis-size debt. Most stem from over-reliance on seller-provided numbers without independent verification.
Using the OM pro forma as your underwriting inputs
The broker's pro forma is marketing, not analysis. It presents the property in the best possible light: optimistic rents, low vacancy, below-market expenses. Always build your own model from the T12 and rent roll, then compare your conclusions to the OM. Large divergences tell you something.
Underestimating operating expenses (or accepting the seller's)
Sellers routinely underreport expenses by deferring maintenance, self-managing below market cost, or excluding reserves. A common manipulation is an unusually low repairs and maintenance line. Per NAA research, total operating expenses exceeded $8,657 per unit in 2024. Use this as a sanity check. If the seller's reported expenses are significantly lower, find out why.
Using below-5% vacancy on a stabilized asset
Underwriting with 3% vacancy when a property is currently at 98% occupancy bakes in perfection. Markets cycle. Submarket vacancy will move. Most lenders and institutional underwriters use 5% as the floor for stabilized vacancy. Stress-test to 10% to see how the deal performs in a downturn.
Ignoring property tax reassessment after sale
In many states, a sale triggers property tax reassessment at the purchase price. If you buy at a 20% premium to the seller's current assessed value, your Year 1 property taxes could be 20% higher than the T12 shows. Model the post-sale assessed value, not the seller's current tax bill.
Assuming aggressive Year 1 and Year 2 rent growth
Pro formas routinely project 4 to 5% annual rent growth in markets where historical performance shows 2%. Because the terminal value is a function of Year 5 or Year 7 NOI, even modest early-year overestimates compound into dramatically inflated exit values. Use conservative rent growth and confirm with NMHC market data and local submarket research.
Not verifying the rent roll against actual leases or bank statements
Rent rolls are generated by property managers and can be manipulated. Artificial occupancy inflation is more common than buyers expect, especially near sale. Cross-check the rent roll against actual bank deposits and physical lease agreements during due diligence. Any unit where scheduled rent does not appear as a recurring bank deposit warrants investigation.
Excluding capital expenditures from the return model
CapEx does not appear in NOI, but it directly impacts cash returns. A property with a $500K deferred maintenance bill that shows up clean in the T12 is not priced correctly if you did not underwrite the capital need. Always order a Property Condition Assessment and model CapEx separately as a cash outflow below the NOI line.
What should a multifamily underwriting model include?
A complete multifamily underwriting model covers every layer of the investment, from unit-level revenue to equity-level returns. Here is what each section should contain.
| Model Section | What it contains |
|---|---|
| Deal Summary Tab | Purchase price, unit count, price per unit, equity required, loan amount, key return metrics (IRR, CoC, EM) summarized for quick review. |
| Unit Mix Schedule | Unit type, count, average size (SF), in-place rent, market rent, loss-to-lease by unit type. Populated from the rent roll. |
| Income Schedule | GPR, vacancy and credit loss, concessions, ancillary income by category, EGI by year over the hold period. |
| Expense Schedule | Line-by-line operating expenses by category with per-unit and percentage-of-EGI benchmarks. Annual expense growth rate assumption. |
| NOI Build | EGI minus total expenses, producing annual NOI for each year of the hold. Separate columns for in-place and stabilized NOI. |
| Debt Schedule | Loan terms (rate, amortization, interest-only period), annual debt service, DSCR by year, LTV at acquisition and at exit. |
| CapEx Schedule | Renovation budget (value-add), annual reserves, timeline. For value-add deals: unit turn costs, common area renovation, exterior improvements. |
| Cash Flow Waterfall | NOI minus debt service minus CapEx plus proceeds from sale, producing annual levered cash flows for equity return calculation. |
| Exit Analysis | Exit year NOI divided by exit cap rate produces gross sale price. Net sale proceeds after payoff and selling costs flow to equity. |
| Returns Summary | IRR, equity multiple, and average cash-on-cash across the hold. Modeled for base, upside, and downside scenarios. |
| Sensitivity Tables | IRR and equity multiple across a matrix of exit cap rates and rent growth assumptions. Identifies which variables matter most. |
The model is only as good as the data going in
The hardest part of multifamily underwriting is not the math. It is extracting accurate numbers from a PDF rent roll, a scanned T12, and five versions of a broker OM. Primer reads any document format, reconciles conflicting data across sources, and maps every number into your model with a citation back to the original page and table. Every cell is traceable.
See Primer in actionFree multifamily underwriting tools
These free templates and calculators from Primer cover every stage of the underwriting workflow, from initial rent roll review through final DSCR calculation.
Authoritative Sources Referenced in This Guide
- Fannie Mae Multifamily Guide: Property Income and Underwriting — DSCR minimums, LTV standards, agency underwriting requirements
- CBRE U.S. Cap Rate Survey H1 2025 — Multifamily going-in and exit cap rate data by market
- NAA Income/Expense IQ Benchmarks — Operating expense per unit benchmarks across 100+ markets
- NMHC Apartment Industry Quick Facts — Apartment market data, occupancy, and rent trends
- IRS Publication 527: Residential Rental Property — 27.5-year depreciation schedule for multifamily buildings
- IRS Publication 946: How To Depreciate Property — Depreciation methods, recovery periods, and MACRS schedules
- Fannie Mae Multifamily — Agency multifamily financing programs and requirements
- NAA: Navigating Elevated Costs in Multifamily — 2024 expense trends and operating cost benchmarks