Multifamily underwriting is a discipline. Done well, it lets you confidently buy a property knowing what it should produce. Done poorly, it leads to optimistic assumptions, missed expenses, and value-add plans that don't pencil. The difference between a multifamily winner and loser is usually how seriously the buyer underwrote the deal.

This lesson walks through the multifamily underwriting process step by step.

What you need to underwrite

For any multifamily deal, request the following from the seller or broker:

Current rent roll — every unit, its current rent, lease term, and tenant
Trailing 12-month operating statement (T-12) — actual income and expenses for the past year
Trailing 24-month or 36-month statements — to see trends
Property tax records — current and historical
Insurance binder or policy declarations — current premium and coverage
Utility bills — last 12 months (if landlord-paid)
Capital expenditure history — what's been replaced recently and what hasn't
Service contracts — pest control, landscaping, trash, internet
Floor plans and unit mix — with square footages
Survey — for property boundaries and easements
Title commitment — for liens and encumbrances
Environmental Phase I — for environmental conditions

If the seller won't provide these, walk away. A serious seller has documentation ready.

Reading the rent roll

The rent roll is the foundation of multifamily income analysis. Read it carefully.

Key columns in a rent roll

| Column | What it tells you | |---|---| | Unit number | Specific apartment | | Unit type | 1BR/1BA, 2BR/2BA, etc. | | Square footage | Useful for $/SF analysis | | Tenant name | Verifies tenancy | | Lease start | When current lease began | | Lease end | When lease expires | | Lease rent | Contracted monthly rent | | Market rent | What management thinks the unit could rent for | | Other income | Pet fees, parking, storage, RUBS | | Status | Occupied, vacant, notice, etc. |

What to calculate from the rent roll

Occupancy rate:

Occupied units / Total units = Physical occupancy

For most stabilized multifamily, target 92-96% physical occupancy. Below 90% suggests issues. Above 97% may suggest under-pricing.

Loss to lease:

(Market rent - In-place rent) / Market rent = Loss to lease %

A 5-10% loss to lease is normal. 15%+ loss to lease suggests significant value-add upside through lease turnover. Negative loss to lease (in-place rents above market) suggests rent-pushed property at risk of decline.

Rent variance by unit:

Look for big rent variations within the same unit type. If 2BR/2BA units range from $1,200 to $1,800 with no quality differences, you have either old leases dragging down rents (upside) or undisclosed unit-level issues (problem).

Lease expiration schedule:

How are leases distributed over the next 12 months? A property with 100% of leases expiring in the same month is a turnover bomb. A staggered expiration schedule is healthier.

Concession patterns:

Look for rent concessions ("first month free," "$500 off") in recent leases. Heavy concessions suggest the property is over-asking and effective rents are lower than nominal.

Red flags in the rent roll

Many recent move-outs without re-leases (high turnover)
Long-vacant units (why aren't they leasing?)
Heavy concessions on new leases
Many month-to-month tenants (instability)
Section 8 concentration that wasn't disclosed
Friends/family rents (below-market favorites)
Owner units (free or below-market)

Reading the T-12

The T-12 (trailing 12-month operating statement) shows actual cash performance.

Income side

Gross potential rent (GPR): The total rent if all units were leased at market rent for 12 months. This is the theoretical maximum.

Gain/(loss) to lease: Adjustment from market rent to in-place rent (the loss-to-lease from the rent roll).

Vacancy loss: Rent lost due to vacant units. Usually 4-8% of GPR.

Concessions: Free rent, move-in specials, etc.

Bad debt: Rent contracted but not collected (write-offs).

Net rental income: GPR less the above adjustments. This is what you actually collect from rent.

Other income:

Application fees
Pet fees
Late fees
Laundry income
Parking
RUBS (Resident Utility Billback)
Storage rental
Vending

Total income = Net rental income + Other income

Expense side

Multifamily operating expenses typically run 35-50% of effective gross income for unstabilized older properties, 30-40% for stabilized modern properties.

Property taxes: Get the actual current bill AND check the property appraiser's site to see if reassessment is coming. Florida specifically: taxes WILL reset to sale price.

Insurance: Florida insurance has been brutal — verify current premium, not what the seller paid 3 years ago. Get a current quote from your own broker.

Property management: Typically 3-5% of effective income for third-party management. If self-managed, add it to your underwriting (you'll need to pay someone eventually).

Repairs and maintenance: $300-$700 per unit per year for stabilized properties. Older Class C properties often run higher.

Turnover costs: $500-$2,500 per turn (paint, clean, minor repairs). Depends on unit quality.

Utilities (if landlord-paid): Water/sewer (commonly landlord), trash, gas, electric (rare for landlord). Verify what's metered and what's master-metered.

Landscaping, pool, pest control: Service contracts.

Marketing and advertising: Online listings, signage, leasing fees.

Administrative: Office supplies, software, bank fees.

Payroll (for on-site staff): Manager, leasing, maintenance. For 100+ unit communities.

Replacement reserves: $200-$400 per unit per year set aside for future capital costs (HVAC, roofs, appliances). Lenders typically require this.

What to verify on the T-12

Compare T-12 to T-24 and T-36 — are expenses going up? Is income going up? Are trends believable?
Compare to budget — was the year normal or unusual?
Identify one-time items — large legal expenses, lawsuit settlements, lightning-strike repairs (back them out)
Look for missing categories — every property has insurance, pest control, landscaping; if a category is missing, ask
Compare to industry benchmarks — does the expense ratio look right for the asset class and age?

Building the pro forma

The pro forma projects forward what the property will produce under your ownership. Build it conservatively.

Year 1 underwriting

Income side:

Start with current rent roll (in-place rents)
Apply "achievable rent" not "market rent" — usually 2-5% conservative discount
Project occupancy at conservative level (5-7% vacancy)
Project bad debt at 1-2%
Add other income realistically

Expense side:

Reset property taxes to expected new assessment (use sale price, ask the assessor)
Reset insurance to current quoted rate (not seller's old policy)
Use management fee that reflects who will actually manage
Use repair budget appropriate to property condition
Don't forget capital reserves

Result: Year 1 NOI

Years 2-5 (or longer)

For value-add deals, model:

Rent growth from renovations — phased renovation schedule, achievable post-reno rents (not aspirational)
Market rent growth — 2-3% annually (not 5%+ unless market data supports)
Expense growth — 2-3% annually for most expenses; insurance often higher
Vacancy during renovations — units offline for 30-60 days each
Renovation capex — $5K-$15K per unit typically

For stabilized deals, model:

Rent growth at market trends
Expense growth at inflation
Capex for known upcoming items

Sale year underwriting

Most multifamily deals are underwritten with a defined exit (typically 5-7 years).

Exit cap rate: usually 25-50 bps higher than going-in cap (conservative assumption that rates may rise)
Sale price: Year 5 (or exit year) NOI / Exit cap
Sale costs: 1-3% (broker commission, title, legal)
Loan payoff: Remaining principal balance
Equity proceeds: Sale price - sale costs - loan payoff

Returns calculations

From the projected cash flows and exit, calculate:

Cash-on-cash return by year
IRR (Internal Rate of Return) over the hold period
Equity multiple (total cash returned / equity invested)
Average cash-on-cash over the hold

For value-add deals, target:

Year 1 cash-on-cash: 4-6% (low because of renovations)
Stabilized cash-on-cash: 8-12%
IRR: 14-20%
Equity multiple: 1.7-2.2x over 5 years

Stress-testing the assumptions

A pro forma is only as good as its assumptions. Stress-test by changing key inputs:

Sensitivity tests

Rent growth: What if rents grow 1% instead of 3%?
Vacancy: What if vacancy is 10% instead of 5%?
Renovations: What if renovation costs are 25% over budget?
Insurance: What if insurance premium doubles?
Taxes: What if reassessment is 20% higher than expected?
Exit cap rate: What if exit cap is 100 bps higher?
Interest rate: What if rates rise 100 bps before refi?

For each, calculate the impact on IRR. A robust deal still produces acceptable returns under stress. A fragile deal collapses.

The "what if everything goes wrong" test

Run a scenario where:

Rents grow at 1% (not 3%)
Vacancy is 8% (not 5%)
Renovation costs are 20% over
Exit cap is 75 bps higher
Year 5 sale instead of Year 7

If IRR is still positive (just lower), the deal is robust. If IRR goes negative or you can't service debt, walk away.

Common multifamily underwriting mistakes

Trusting the seller's pro forma — sellers always show optimistic projections
Using market rent instead of achievable rent — there's a gap
Forgetting tax reset — Florida specifically punishes this
Missing insurance reality — Florida insurance has changed dramatically
Ignoring concessions — effective rent is below face rent
Underestimating turnover costs — $500/turn is wishful for many properties
No replacement reserves — capital needs don't go away just because you ignore them
Aggressive exit cap — assuming you can sell at the same cap you bought is risky
Aggressive rent growth — 5% annual rent growth is not the long-term norm
Skipping the worst case — only running the base case

What to take away

Multifamily underwriting starts with the rent roll and T-12 — request and verify both
The rent roll tells you in-place rent, occupancy, loss-to-lease, and turnover risk
The T-12 shows actual income and expenses over the past year
Florida-specific: tax reset, insurance, and replacement reserves all materially impact returns
The pro forma should be conservative — use achievable rents, conservative occupancy, real expense projections
Year 1 returns matter, but the value-add story plays out in years 2-5
Always stress-test the assumptions before committing to a deal
Common mistakes include trusting seller projections, missing expenses, and aggressive exit assumptions
A robust deal performs even under stress — a fragile deal collapses

Next lesson: agency debt — Fannie Mae, Freddie Mac, and the financing structures that make multifamily so attractive vs other commercial property types.

Underwriting a Multifamily Deal