A Real Life Example That Proves the Importance of Underwriting Multifamily Numbers

by | BiggerPockets.com

I keep telling you guys: Underwrite your numbers! Look at the trailing financials, sure. Understand broker’s pro forma, sure. But underwrite your numbers…

Understand this: It doesn’t matter how much income the previous owner brought in or how much the broker thinks you should be able to bring in. What matters is how much income YOU think you can bring in.

Similarly, it doesn’t matter how much the previous owner spent to run the property or how much the broker thinks you should spend. It’s how much YOU think running this property correctly will cost you.

Underwrite to your numbers. Got it?

A Recent Example

I spent a couple of days working up 120+ units in a submarket I know very well. This is a community that just came on the market with a national broker.

Even though the community is listed as “un-priced,” having seen a lot of OMs by this company, I knew just by looking at their pro forma that they were aiming for no less than $4,000,000. Having spoken to them, I realized that I was wrong–they are really pushing $4,500,000.

A Few Things to Note

As I mentioned, I know the market very well; it is in my target area. I also know all of the heavy hitters in this area. There has never been a transaction involving 100+ units that traded anywhere near $40,000/door, ever! Players in this submarket understand that the dynamics there just do not warrant this type of pricing.

You should also know that I had personally contacted the big investors in this sub-market for two reasons: to establish whether anyone would be pursuing this deal and to gauge what people thought the value of it was.

As it turned out, none of the typical players, aside perhaps for me, was interested in playing. And everyone agreed that the price at which the deal made sense was considerably less than that which the broker was peddling this for–considerably less.

My Underwriting

Here are some points of interest:

My gross potential income–this is the total income if I had zero economic losses–is within $5,000 from the broker’s projection. Basically what this says is that I agree with the broker’s estimate of what rents the property can bear.

My other income–which includes income from laundry, pet rent, application fees, late fees, etc.–is lower by about $25,000 than the broker’s projection. But my number is practically identical to the trailing 12 number. This is the broker saying to me, “We know that the current management has only been able to achieve $xyz, but you are better and will achieve $xyz + $25,000…”

Related: The Costly Mistake Most Investors Make When Underwriting Apartment Expenses

This might be, but I am not sure I clearly see where and how. In this case, the trailing number is practically right on in my opinion for this marketplace.

And thus, so far I am only $25,000 below broker’s pro forma!

However, my Effective Gross Income, which is the bottom line income number that takes into account economic losses such as vacancy, concessions, bad debt, LTL, etc., ends up $60,000 lower than the broker’s. At a 10 CAP, this is $600,000 of value, and at a 9 CAP, which is what I think the trading rate for this asset should be (and broker agrees), this discrepancy constitutes $666,000 of value. Suddenly I am not doing so well…

Perhaps I Can Recapture Some Losses in Expenses

Nope, not gonna happen. The broker’s underwriting suggests that it’ll cost about $450,000/annum to run this property, while I think it’ll cost $475,000. Thus, a loss of an additional $25,000, which capitalizes to another $275,000 of value.

All and all, I am $85,000+/year off on cash flow, which means I am $1,000,000 off on the valuation…

And we haven’t even touched the up-front CapEx that the property definitely requires.

Related: Multifamily Myths: Why You Don’t Control The Value Like Everyone Says You Do


The $25,000 gap on the expense side can be bridged; we are close enough. The big issue is the $60,000 of income that I lose due to the economic losses. I know this particular marketplace–I target it. I know the tenant class and all of the vacancy, eviction costs, bad debt, and LTL in this marketplace.

Economic losses are what they are, and they are real dollars, and in this case they are about 10% higher than that which the broker’s pro forma attempts to make us believe.

And you know something else? The broker doesn’t even disagree with me. 🙂 He said so while on the phone with me, which means one of two things: Either he is looking for an idiot who wouldn’t know multi-family underwriting if it hit him in the mouth (which most buyers today are), or he is looking for a 1031 buyer who flat out doesn’t care!


I am not one or the other. I respectfully bow out on this one, unless they decide to get real…

Now it’s your turn to weigh in: Do you agree with my decision regarding this deal?

Let me know with a comment!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at JustAskBenWhy.com.


  1. Roy N.


    I’m zero for seven this year: was over bid on two and ended up letting the others die on the table.
    But it costs me only a bit of time, a few phone calls, and, maybe a little gas money at this point.

    In the case of one of the properties – a modest 30 unit – out is the only LOI they have received, yet they remain committed (6-months later) that their property is worth $15K/unit more than it really is.

  2. Ronald Perich

    Always enjoy the posts, Ben. I recently picked up nine units at about 100K less than they wanted. But their numbers just didn’t match reality, especially with the repairs and CapEx needed. Should cash flow nicely after a year turnaround, but you have to be realistic with this stuff. Market is so pressured right now. I think the word Brandon used is frothy and I wholeheartedly agree.

    • Ben Leybovich

      Ron – thanks so much!

      Congrats on the 9 units. I am slated to write an article for my blog this morning, as part of the series detailing my acquisition of a 10-unit in 2013. I wrote about it here several times as well. Just a synopsis, since I think it applies to you:

      It was fully occupied on day of closing, which was in February. Yet, due to much higher than I anticipates economic losses, and CapEx, which I did anticipate but thought I’d have more time to catch, in the 11 months of 2013 I cash flowed $3,000 – that’s it… My underwriting indicated stabilized pro forma CF of $12,000 conservatively, but I had been hoping to out-perform. So much for that in 2013.

      In 2014, I cash flow, and by that I mean cash basis accounting including P&I and CapEx, $12,000. Back on track.

      T8 in 2015 currently sits at about $16,000 – $200/door/month. If this kind of nonsense keeps on, I’d finish the year with $24,000 of CF out of that building. Naturally, I don’t think this’ll happen. But, I do think I could touch $20,000 when all is said and done in 2015.

      But, this has taken 3 years – longer than I expected, but now I know to adjust my expectations 🙂

      Incidentally, to Aleksander’s question relative to % Operating Costs – I am currently at 36% in this building, which explains the strong cash flow. Keep an eye out for detailed article on my website…

  3. Aleksandar P.

    Another great post Ben. I see these kind of nonsense from listing brokers in my area (Chicago) on almost every property (small MF) that is listed for sale. I don’t have a doubt that they have always done that, but it looks like they sensed the increased demand for MFs and they feel comfortable presenting these “pay in the sky” numbers, as your friend Serge likes to say. You definitely did the right thing.

    I noticed one thing. Based on the data you presented, your estimate for annual expenses – $475k doesn’t even come close to the number that you would get if you followed “50% rule”. Is it true that you really can’t rely on this rule for big multi-families (>50 units) or this was the case in this example only?

    Again, thanks for everything you do to make us better investors.

    • Ben Leybovich

      Thanks a lot, Aleksandar!

      To answer your question:

      1. 50 units is not large multifamily. In fact, it is the most difficult to underwrite, because while it is too big to handle without pay roll, it is too small to support pay roll. So, to own and manage one of those you must fudge systems, which you might do if you live within 20 minutes, but not if you are hours away…

      2. % operating cost should not exceed 55%. On this particular deal I am at 53%. The element that lives between the NOI and CF is the Debt Service – this is one of the reasons why I can only pay what I can pay. I have to keep my debt service low in order to facilitate comfortable CF and DSCR. The properties that truly perform comfortably well are 45% or below, but it’s almost impossible to facilitate that with pay roll and management fees present.

      Numbers are what they are because the narrative is what it is. Brokers want us to believe a pie in the sky narrative – sorry 🙁

  4. Rick L.


    Thanks for the article. This has been my exact experience while in pursuit of a 20+ unit apartment building. Seller’s are on the far left, with VERY low expenses listed and no reserves for replacement provided. I’m on the far right with conservative, but what I think are realistic expenses. We end up being world’s apart from one anther.

    Besides just simply knowing your market, how to you quantify and justify you expense numbers. I’ve tried providing national executive summary reports that display annual operating expenses; which usually run between 45%-55%. However, seller’s/broker’s just scoff at these reports and my arguments.

    I literally had one broker tell me that he would buy the property for the price I offered.

  5. Kevin Harrison

    So while I haven’t done any multifamily yet, I was wondering if there is a book out there or someone like @Ben leybovich who could point the way for under writing Large medium and small multifamily. It seems like this is a market where being off by a couple of thousand on something could make the difference in a good buy and a bad one in the long run. This as opposed to SFH where If you pay $5000 too much you might learn an expensive lesson but not lose your shirt.

  6. Kevin Harrison

    So while I haven’t done any multifamily yet, I was wondering if there is a book out there or someone like @Ben leybovich who could point the way for under writing Large medium and small multifamily. It seems like this is a market where being off by a couple of thousand on something could make the difference in a good buy and a bad one in the long run. This as opposed to SFH where If you pay $5000 too much you might learn an expensive lesson but not lose your shirt.

    • Ben Leybovich

      Multifamily is a very general term, Kevin. If you want info on 100-unit + communities, I am not sure that this can be taught in a book or a course. There’s too much perspective involved. If, however, you are interested in small and mid-size stuff that you will self-manage without pay roll, there is a lot of info on my website. Please check out CFFU.

      And you are right, small mistakes are amplified larger and larger as unit count goes up 🙁

  7. Michael Blank

    Hi Ben … I share your frustration. Given the uncertainty of the stock market in the last year, there is a lot of cash chasing the stability of commercial real estate. The big brokers in particular have such large buyer’s lists that when they list properties in “less desirable or hot” markets, they market this to their west or east coast buyers who think that $40K per unit is a bargain. I did due diligence on a property in TN a couple of months ago, and the out-of-state owner clearly overpaid when he bought it 6 years ago. He paid $35K per unit and was asking $41K when the market was actually between $25K and $30K. SOME out of town buyer will pay it!

  8. Heather Longfellow

    Thank you for this article it is so very important for investors to check these numbers.That is why multi family’s are more tricky as I have found a lot of sellers provide inaccurate information less expenses more income and always fully rented on paper.However what a thrill to have all the figures and to be able to offer a

  9. Alan Brown

    THANK YOU SO MUCH!! I am walking away quickly, maybe running away from a 14 plex and an 8 plex that I can’t seem to make sense of the numbers! The 14 plex is at $57k per door!!! I thought I must be crazy to want to offer over $200k less for the property, but there’s no way I’d pay what he’s asking! I’m a full on Newbie at multi’s, other than the 6 plex I just sold, (doing a 1031 and panicking a little!). but I guess I know when something seems not right; I need to get to your website and make sure I’m not doing anything too stupid.
    Thanks again

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