How to Underwrite a Multifamily Deal Step-by-Step
Saturday, February 28, 2026
The difference between investors who build generational wealth and those who lose their shirts comes down to one critical skill: proper underwriting.
I’ve seen it countless times over my 40+ years in real estate. Smart, capable people get excited about a deal, fall in love with a property, and then try to make the numbers work. That’s backwards—and it’s expensive.
Professional investors do it differently. We let the numbers tell us whether a deal deserves our attention. The spreadsheet doesn’t lie, and it certainly doesn’t care about your feelings.
I’m Rod Khleif, and I’ve personally owned over 2,000 rental properties and apartment buildings. I’ve also made every underwriting mistake you can imagine—including losing $50 million in the 2008 crash, partially because I got aggressive with my assumptions.
What I’m about to share with you is the exact underwriting process that my Warrior Program students use to analyze deals. These same students now collectively own over 260,000 apartment units. This framework works whether you’re looking at your first 8-unit building or a 200-unit value-add opportunity.
Let me walk you through how to underwrite a multifamily deal step-by-step, so you can evaluate properties with the confidence of a seasoned pro.
Underwriting is the process of analyzing a property’s financial performance to determine if it meets your investment criteria. It’s how you separate good deals from disasters before you put a single dollar at risk.
Think of underwriting as your financial defense system. It answers critical questions like:
Here’s what most new investors don’t understand: the seller’s pro forma is a sales document, not a financial analysis.It’s designed to make the property look as attractive as possible. Your job as an investor is to reconstruct reality using conservative assumptions backed by actual market data.
When you master underwriting, you gain the power to:
(Learn more about finding and analyzing multifamily deals like a pro.)
You can’t underwrite what you can’t see. Before you open a spreadsheet, request these documents from the seller or broker:
1. Trailing 12-Month (T-12) Income Statement
This shows actual income and expenses for the past year. It’s the single most important document for underwriting.
2. Rent Roll
A detailed list of every unit showing:
3. Pro Forma (Seller’s Projections)
The seller’s optimistic projections. Use this to understand what they think the property can do, but always verify with your own analysis.
4. Operating Expense Detail
Breakdown of all operating expenses by category for the past 2-3 years if possible.
5. Current Leases
Especially important for properties with commercial space or unique lease structures.
6. Utility Bills
Who pays what? Are utilities separately metered or master metered?
7. Capital Expenditure History
What major repairs or improvements have been done recently? What’s still needed?
8. Delinquency Report
How much rent is currently uncollected?
Once you have these documents, you’re ready to start the underwriting process. (Access Rod’s free multifamily deal analyzer to streamline your analysis.)
Income is the foundation of your entire underwriting. Get this wrong, and everything downstream breaks.
Start with the rent roll. For each unit type, calculate the average current rent:
Example:
Monthly GPR = (20 × $1,200) + (15 × $1,500) = $24,000 + $22,500 = $46,500
Annual GPR = $46,500 × 12 = $558,000
Now compare current rents to market rates. Use:
If current rents are below market, you’ve identified upside potential. If they’re above market, that’s a red flag.
Conservative approach: Don’t assume you can immediately raise rents to market. Factor in lease rollover timing and potential tenant pushback.
Don’t forget secondary income sources:
Critical rule: Verify other income against the T-12 statement. Sellers often inflate these projections.
If current rents are significantly below market, calculate your “loss to lease”—the difference between what you’re collecting and what you could collect at market rates.
This represents your value-add opportunity, but be realistic about how quickly you can capture it.
No property stays 100% occupied 100% of the time. Vacancy and credit loss accounts for:
Don’t just guess. Your vacancy assumption should be based on:
Conservative guidelines:
Example:
Annual GPR: $558,000
Vacancy (8%): -$44,640
Effective Gross Income: $513,360
Never use less than 5% vacancy unless you have exceptional justification. Properties with claimed 95%+ occupancy still need reserve for turnover.
This is where inexperienced investors get destroyed. They underestimate expenses, the property underperforms, and suddenly there’s no cash flow.
1. Property Taxes
2. Insurance
3. Utilities
Carefully review who pays what. If tenants pay their own utilities, these expenses should be minimal. If master metered, utilities can be a massive expense line.
4. Property Management
5. Repairs and Maintenance
6. Payroll (if applicable)
7. Administrative Expenses
8. Reserves for Replacements (CapEx)
This is NOT an operating expense for NOI calculation, but you must budget for it:
Budget $200-500 per unit per year depending on property age and condition.
Expense Ratio = Operating Expenses ÷ Gross Potential Income
Typical ranges:
If a seller’s pro forma shows expenses significantly below these ranges, they’re likely underestimating.
Example:
Gross Potential Income: $558,000
Estimated Operating Expenses: $251,100
Expense Ratio: $251,100 ÷ $558,000 = 45%
(Use Rod’s commercial real estate underwriting tool to calculate expense ratios instantly.)
Now we get to the number that determines property value: Net Operating Income.
NOI = Effective Gross Income – Operating Expenses
Using our example:
Effective Gross Income: $513,360
Operating Expenses: -$251,100
Net Operating Income (NOI): $262,260
NOI represents the property’s ability to generate income before debt service. This is what lenders and appraisers focus on.
Critical point: NOI excludes:
Current/Stabilized NOI: Based on actual current income and conservative expense estimates
Proforma/Forward NOI: Based on projected income after you execute your business plan (rent increases, expense reductions, etc.)
Always underwrite to both. Your purchase price should be based on current NOI. Your projected returns should be based on proforma NOI, but stress-tested conservatively.
The capitalization rate (cap rate) is how you convert NOI into property value.
Property Value = NOI ÷ Cap Rate
1. Market Comps
What are similar properties selling for in the same submarket?
2. Broker Market Reports
Marcus & Millichap, CBRE, Colliers publish quarterly cap rate reports by market
3. Property Class Adjustments
4. Risk Adjustment
Higher risk = higher cap rate required
Example:
Current NOI: $262,260
Market Cap Rate: 7.0%
Property Value: $262,260 ÷ 0.07 = $3,746,571
If the seller is asking $4.2 million, you’re looking at a significant overpayment unless you can justify it with value-add upside.
Going-In Cap Rate: Based on current NOI at purchase
Exit Cap Rate: What you assume when you sell (typically 50-100 basis points higher for conservatism)
Never assume you’ll sell at a lower cap rate than you bought. Markets change, and conservative underwriting means planning for expansion, not compression.
If you’re pursuing a value-add strategy, rent growth modeling is critical.
1. Market Rent Growth
Natural appreciation due to market conditions
2. Loss-to-Lease Capture
Bringing below-market units to market rates
3. Value-Add Renovations
Rent premiums from unit upgrades
Let’s say you have a 35-unit property:
Year 1:
Calculation:
Critical assumptions to document:
This is where professionals separate themselves from amateurs. Anyone can make a deal work with aggressive assumptions. The question is: does it work when things go wrong?
1. Expense Shock Test
Increase all operating expenses by 10-20%
If the deal breaks with a 15% expense increase, it’s too risky.
2. Income Reduction Test
Decrease income by 10%
3. Higher Interest Rate Test
Model debt service at 100-200 basis points higher than quoted
Interest rates change. Bridge loans reset. What if your refi rate is higher than expected?
4. Extended Timeline Test
What if your value-add takes 24 months instead of 12?
5. Exit Cap Rate Expansion
Model your exit at 50-100 basis points higher than current market
Cap rates compress in good times and expand in bad times. Conservative underwriting plans for expansion.
I always run one nightmare scenario:
If the deal still produces some return in this scenario, you have downside protection. If it’s a total disaster, you’re taking on too much risk.
(Discover how Rod analyzed a $65M deal in Savannah and walked away due to conservative stress testing.)
While stress testing looks at specific scenarios, sensitivity analysis shows you how changes in key variables impact your returns across a range of outcomes.
1. Exit Cap Rate Sensitivity
Model your IRR and equity multiple at exit cap rates of:
This shows you how sensitive your returns are to market conditions at exit.
2. Rent Growth Sensitivity
Model annual rent growth at:
If you need 4% annual rent growth to hit your targets, but historical market average is 2%, you’re in trouble.
3. Renovation Premium Sensitivity
If you’re underwriting a $150/month rent increase from renovations, model:
What if you only capture $100? Does the deal still work?
4. Occupancy Sensitivity
Model stabilized occupancy at:
Build a simple table showing IRR outcomes:
| Exit Cap 6.5% | Exit Cap 7.0% | Exit Cap 7.5% | Exit Cap 8.0% | |
|---|---|---|---|---|
| 2% Rent Growth | 16.2% IRR | 14.8% IRR | 13.1% IRR | 11.7% IRR |
| 3% Rent Growth | 18.5% IRR | 16.9% IRR | 15.2% IRR | 13.8% IRR |
| 4% Rent Growth | 20.9% IRR | 19.1% IRR | 17.3% IRR | 15.7% IRR |
This shows you the range of potential outcomes and helps you understand where your assumptions need to be most accurate.
Even if a property has strong NOI, it needs to support the debt you’re putting on it.
DSCR = NOI ÷ Annual Debt Service
Most lenders require:
Example:
NOI: $262,260
Annual debt service: $210,000
DSCR: $262,260 ÷ $210,000 = 1.25x
This property can support the proposed debt.
Lenders also limit how much they’ll lend based on property value:
Example:
Appraised value: $3,750,000
75% LTV: $2,812,500 max loan
After accounting for debt service, what return do you generate on your actual cash invested?
Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested
Example:
Purchase price: $3,750,000
Down payment (25%): $937,500
Closing costs: $75,000
Total cash invested: $1,012,500
Annual NOI: $262,260
Annual debt service: -$210,000
Annual cash flow: $52,260
Cash-on-Cash: $52,260 ÷ $1,012,500 = 5.16%
Target minimum: 8-10% cash-on-cash for value-add deals
You can create an underwriting model in Excel or use specialized software. Here’s the structure:
(Get started with Rod’s free multifamily deal analyzer that includes all these calculations pre-built.)
After underwriting thousands of deals, here are the warning signs I’ve learned to never ignore:
1. Seller Won’t Provide T-12 or Rent Roll
If they won’t show you actual performance, there’s a reason. Walk away.
2. Pro Forma Shows Unrealistic Expense Ratios
Expenses at 30% for a Class B property? They’re lying or clueless. Either way, bad news.
3. “Market Rent” Claims Without Comps
Seller says units should rent for $1,800 but provides no proof? Do your own research.
4. Deferred Maintenance Everywhere
If the roof, HVAC, and parking lot all need replacement, factor those costs or walk.
1. Returns Only Work with Aggressive Assumptions
If you need 5% annual rent growth and a compressed exit cap to hit your targets, you’re gambling, not investing.
2. Negative Leverage
If your cap rate is lower than your interest rate, the debt is hurting returns, not helping.
3. No Margin for Error
If a 10% expense increase kills the deal, you have no downside protection.
4. Relying on Market Appreciation
Your underwriting should work based on income alone. Appreciation is a bonus, not the strategy.
(Learn about multifamily underwriting fundamentals from Rod’s podcast with Adam Wolfson.)
Here’s the exact checklist I use (and my Warrior students use) for every deal:
Download the Complete Multifamily Underwriting Checklist (PDF)
The Problem: Seller pro formas are sales documents designed to maximize perceived value.
The Solution: Build your own model from scratch using the T-12 as your starting point. Trust but verify every assumption.
The Problem: New investors consistently underbudget expenses, especially maintenance, CapEx, and property taxes.
The Solution: Use conservative expense ratios based on property class. Get actual quotes for taxes and insurance. Budget high for maintenance and CapEx.
The Problem: Assuming you can immediately raise rents to market or that markets will grow 5% annually.
The Solution: Phase rent increases over 12-36 months. Use historical market data for growth rates (typically 2-3%). Stress test with zero growth.
The Problem: Focusing only on NOI and forgetting that roofs, HVAC systems, and parking lots eventually need replacement.
The Solution: Always budget $200-500/unit/year for capital reserves. Inspect the property and create a CapEx plan.
The Problem: Wanting a deal to work so badly that you rationalize aggressive assumptions.
The Solution: Underwrite deals emotionlessly. The numbers either work or they don’t. Be willing to walk away from 90% of what you analyze.
Once you master the basics, here are advanced techniques:
Don’t just average rents. Analyze each unit:
Understand micro-market dynamics:
If utilities are master-metered, implementing RUBS (Ratio Utility Billing System) can shift $200-500/month per unit in expense to tenants.
Model the income impact but factor in implementation costs and potential tenant pushback.
For heavy value-add deals:
(Master these techniques at Rod’s Underwriting & Due Diligence Bootcamp.)
Free Tool:
Paid Software:
Let’s walk through a simplified real-world underwriting:
Property: 42-unit Class B multifamily
Asking Price: $4,200,000
Location: Growing secondary market
Income:
Expenses:
Proforma NOI (Year 2):
Valuation:
The Decision:
Asking price is $4.2M. Current value is $3.1M. Even with the value-add upside, there’s over $1M of overpricing. Pass on this deal or submit a significantly lower offer knowing it will likely be rejected.
This is how professional underwriting protects you from overpaying.
Underwriting is a skill that improves with practice. Here’s how to get started:
(Learn more about Rod’s coaching and training programs.)
Here’s what I want you to understand: there’s no secret formula that makes you a great underwriter overnight. It’s a skill you develop through repetition.
The first deal you underwrite will take you 4-6 hours. The hundredth deal will take you 30 minutes. You’ll develop instincts about what “good” looks like. You’ll spot red flags instantly that would have fooled you as a beginner.
But you have to start. You have to be willing to underwrite deals knowing you’ll probably pass on them. You have to build the reps.
80-90% of your success in multifamily investing is mindset and taking action. Only 10-20% is the technical knowledge. (Learn more about Rod’s mindset training and courses.)
The technical knowledge—the underwriting, the formulas, the spreadsheets—that’s the easy part. Anyone can learn it.
The hard part is having the discipline to:
But when you master that discipline, combined with solid underwriting skills, you become unstoppable.
Q: How long does it take to underwrite a multifamily deal?
A: For experienced investors, initial screening takes 15-30 minutes. A full comprehensive underwrite with sensitivity analysis takes 2-4 hours. As you build experience, you’ll get faster at identifying deals that don’t merit deep analysis.
Q: What’s the most important metric in multifamily underwriting?
A: There’s no single “most important” metric, but if I had to choose, it would be NOI—because it drives both property value and your ability to service debt. However, you need to analyze NOI, cap rate, cash-on-cash return, DSCR, and IRR together to understand the full picture.
Q: Should I trust the seller’s pro forma or build my own?
A: Always build your own. The seller’s pro forma is a sales document designed to make the property look as attractive as possible. Use the seller’s T-12 statement as your starting point and verify every assumption independently. Your underwriting should be conservative; theirs will be aggressive.
Q: What expense ratio should I use for multifamily underwriting?
A: It depends on property class and age. Class A properties typically run 35-45%, Class B properties 40-50%, and Class C properties 45-55%+. Always compare your estimated expense ratio to actual historical performance and market comps. If the seller shows expenses significantly below market norms, they’re underestimating.
Q: How do I determine the right cap rate for a property?
A: Research recent sales of similar properties in the same submarket through brokers, CoStar, or public records. Cap rates vary by market, property class, and risk profile. Don’t rely on national averages—use local market data. When in doubt, use a higher (more conservative) cap rate to determine value.
Q: What’s the difference between cash-on-cash return and IRR?
A: Cash-on-cash return measures first-year cash flow as a percentage of your initial cash investment. IRR (Internal Rate of Return) accounts for the time value of money and includes cash flow, profit at sale, and the timing of all cash flows over your hold period. IRR gives you a more complete picture of total returns, while cash-on-cash shows immediate yield.
Q: How much should I budget for capital expenditures (CapEx)?
A: Budget $200-500 per unit per year depending on property age and condition. Newer Class A properties might be at the lower end; older Class C properties at the higher end. Always get a physical inspection and create a 10-year CapEx plan for major systems (roof, HVAC, parking lot, etc.). CapEx is often the line item that kills deals when ignored.
Rod Khleif is one of the nation’s top multifamily real estate experts, best-selling author of “How to Create Lifetime Cash Flow Through Multifamily Properties,” and host of the “Lifetime Cash Flow Through Real Estate Investing” podcast. Over his 40+ year career, Rod has personally owned and managed over 2,000 rental properties and apartment buildings.
Rod’s Warrior Program students collectively own over 260,000 apartment units, and his mission is to help investors create lifetime cash flow through conservative, disciplined multifamily investing.
Ready to master multifamily underwriting?
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