How to Underwrite a Multifamily Acquisition in 2025

Step 1: Build the Rent Roll

Every multifamily underwriting starts with the rent roll — a unit-by-unit or unit-type summary of current and market rents. For acquisitions, you'll work from the seller's rent roll (T-12 operating statement) and verify it against:

• Current in-place rents — what tenants are actually paying today
• Market rents — what comparable units are renting for in the submarket
• Loss-to-lease — the gap between market and in-place rents (the value-add opportunity)

For a 72-unit Class B value-add in Austin TX: 24 one-bedrooms at $1,250/mo + 36 two-bedrooms at $1,600/mo + 12 three-bedrooms at $2,000/mo = $1,339,200 GPR annually. This is the theoretical maximum if every unit is rented at market and every tenant pays on time.

Step 2: Apply Vacancy and Calculate EGI

No property is 100% occupied 100% of the time. Apply a vacancy and credit loss factor to get Effective Gross Income (EGI):

Vacancy benchmarks vary by market and property class:

Property Class	Stabilized Vacancy	Value-Add (acquisition)
Class A	4–6%	8–15% (lease-up period)
Class B	5–7%	10–15% if repositioning
Class C	7–10%	12–20% for heavy value-add

Other income includes parking fees, laundry revenue, storage unit rents, pet fees, and utility reimbursements. For a 72-unit property, budget $350–700/unit/year in other income depending on amenities.

Step 3: Calculate Net Operating Income (NOI)

NOI is the single most important number in commercial real estate. It drives the cap rate, the property value, and every lender metric. NOI is calculated as:

Operating expenses are broken into controllable (management, maintenance, repairs) and non-controllable (taxes, insurance). Target an Operating Expense Ratio (OER) of 40–55% of EGI. Below 35% suggests deferred maintenance; above 55% signals management issues or aging infrastructure.

Per-unit expense benchmarks for a 2025 Class B apartment:

• Property taxes: $1,500–$2,500/unit/year (varies dramatically by state)
• Insurance: $700–$1,000/unit/year (rising sharply in 2025)
• Utilities (common area): $600–$1,000/unit/year
• Maintenance & repairs: $800–$1,200/unit/year
• Property management: 6–10% of EGI (use 8% as a baseline)
• Payroll/staff: $900–$1,400/unit/year for staffed properties
• Reserves: $250–$500/unit/year

Step 4: Determine the Going-In Cap Rate

The cap rate is what the market is saying a property is worth relative to its current income. It's calculated as:

In a value-add deal, you'll see two cap rates — the going-in cap rate (based on current NOI) and the stabilized cap rate (based on projected NOI after improvements). A typical value-add deal might be acquired at an 8% going-in cap rate but is worth 5.5% stabilized — representing significant value creation.

Step 5: Size the Debt and Test DSCR

Agency lenders (Fannie Mae, Freddie Mac) are the primary source of multifamily financing and set the rules for most deals. The key metrics they underwrite are:

• LTV: Maximum 75% for stabilized assets; 65% for value-add
• DSCR: Minimum 1.25× (Fannie) or 1.20× (Freddie). This means NOI must be at least 25% greater than annual debt service.
• Debt Yield: NOI ÷ Loan Amount. Target ≥8–10%. This is increasingly used because it's independent of interest rates.

On the Austin 72-unit example at $9.6M purchase (65% LTV = $6.24M loan, 6.5% rate, 30-year amortization):

• Annual debt service: ~$473,000
• NOI: ~$772,000
• DSCR: 1.63× (well above minimum)
• Debt yield: 12.4% (strong)

Step 6: Project the Hold Period and Calculate IRR

Most institutional investors underwrite to a 5-year hold period, though individual investors often hold longer. The hold period drives the exit sale price, which is the biggest component of total return in most deals.

The Internal Rate of Return (IRR) accounts for the time value of money across all cash flows:

IRR targets for 2025 by strategy:

Strategy	Unlevered IRR Target	Levered IRR Target	Equity Multiple Target
Core (Class A stabilized)	7.70%	8–10%	1.5–1.8×
Core-Plus	8–9%	10–14%	1.7–2.2×
Value-Add	9.36%	14–20%+	2.0–3.0×
Opportunistic	12%+	20%+	2.5×+

Step 7: Run Sensitivity Analysis

No proforma assumption is certain. Professional underwriters stress-test every deal across four key variables: exit cap rate, rent growth, vacancy rate, and interest rate. A deal that only works under a single set of optimistic assumptions is a risky deal. You want to see:

• Exit cap rate sensitivity: Does the deal still work if you sell at a 50 bps higher cap rate than projected?
• Rent growth: What if rents grow 1% instead of 3% due to new supply?
• Vacancy: What if stabilized occupancy is 10% instead of 5%?
• Interest rate: If rates move 50 bps, does DSCR still clear lender minimums?

The goal of sensitivity analysis is to identify your deal's key risk factors and understand how much the deal can underperform before it stops making sense.

Common Underwriting Mistakes

Even experienced investors make these errors when underwriting multifamily deals:

• Using asking rents as market rents. Verify against actual lease comps. Asking rents can be 5–15% above effective rents in soft markets.
• Underestimating expenses. A T-12 that shows a 28% expense ratio for a Class C property should trigger deep skepticism. Something is missing — likely deferred capital costs.
• Ignoring selling costs at exit. The 5–6% in agent commissions and closing costs at exit dramatically affects IRR. A $15M exit value with 5.5% selling costs means $825k off the top before you see a dollar.
• Applying rent growth to the wrong base. Rent growth applies to the rent portion of EGI, not to other income or vacancy adjustments.
• Using one amortization period for loan term. Agency loans typically have 10-year terms but 30-year amortization — your proforma must show the balloon payment at refinancing.

Frequently Asked Questions

What is a good cap rate for multifamily in 2025?

According to CBRE Q1 2026 data, stabilized Class A multifamily trades at 4.75% going-in cap rates nationally, with Class B value-add entering at 5.26%. Secondary markets and Class C assets can range from 6–10%+. A "good" cap rate depends entirely on your strategy — core investors accept lower cap rates for stability, while value-add buyers demand higher going-in caps as compensation for repositioning risk.

What DSCR do lenders require for multifamily?

Fannie Mae requires a minimum 1.25× DSCR; Freddie Mac allows 1.20× in some programs. Portfolio lenders and banks often require 1.25–1.35×. Bridge lenders for value-add deals may work with lower coverage ratios given the transitional nature of the asset. Always stress-test DSCR at rates 100 bps above your loan rate to satisfy lender requirements.

How do I calculate the exit value in my proforma?

The exit value is simply the projected Year N NOI divided by your assumed exit cap rate. If your hold period is 5 years and you project $868,000 in Year 5 NOI with a 5.5% exit cap rate, the exit value is $868,000 ÷ 0.055 = $15.78 million. From this you subtract selling costs (typically 5–6%) and the remaining loan balance to get net sale proceeds.

What is a typical hold period for multifamily?

Institutional investors typically underwrite to 5–7 year hold periods. Value-add deals are often held 3–5 years (to execute the value-add and capture the reversion), while core/core-plus assets might be held 7–10+ years. The average American holds a rental property for 7–10 years before selling.