The Most Important Things I’ve Learned About Underwriting Multifamily Deals

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What are some of the most important things to look at when evaluating multifamily property investments?

If you’ve been following my journey, you know that I began adding multifamily apartment buildings to my portfolio last year. While there are many similarities to single family property investing, there are some new terms and quirks to learn. Below are some of those I’ve found most important.

How Utilities Are Paid

Utilities are a whole different beast when you move into the multifamily investing world. You need to know who is paying them, what their status is, and how to handle a float to make sure the lights stay on. In a multifamily project, you might have community utilities such as a pool, lobbies, security office, laundry, and exterior lighting. That’s all in addition to keeping on top of individual units. Depending on how big your property is, you could have a $12,000 to $24,000 light bill each month. And don’t forget water, sewer, and trash removal. You need a reserve to be able to keep up with these bills, even if the rent isn’t coming in. Getting the lights or water shut off in a community can create a monumental level of financial and legal issues. At the property my partner and I recently acquired, we’re billing the tenants back for the utilities. This helps our bottom line, which ultimately increases the value of our property.  


Related: How I Bought a Multi-Million Dollar Apartment Complex at the Age of 26


Where will the tenants come from to fill this property? Make sure you are not relying on one employer for your rents—because you never know what could happen. If you have multiple employers around your property, that helps mitigate your risk in the event one decides to relocate or simply shutdown.  


Take a good look at current versus market rents. There could be great value to be uncovered there. You may also have to be patient and be prepared to soak up some costs if current tenants have long leases at out of date rates. Once those leases expire, you can gradually increase the rents to market rates.

Cap Rate

Multifamily properties are typically compared and sold based upon cap rates. That is the NOI divided by the current market value or seller’s asking price. In order to accurately calculate the cap rate, you must know these values. You must research them yourself. The lower the cap rate is, often the more desirable the property and or location is. If the cap rate is up between 11-13%, then you’re most likely in a questionable area.  


Related: Should You Invest in a Small or Mid-Sized Multifamily Deal? Get the Pros & Cons Here!


Net operating income (NOI) is your cash flow from all rents and other income producing services (like laundry) after subtracting your operating expenses, including property management. There may be significant room for improvement here if you can get the expenses down and increase the income.


Obtaining these financials is very important because they break down the actual income and expenses of the building over the last 12 months. Purchasing a property on actuals is ideal versus a pro forma.

What are some of the things you’ve learned about multifamily investing? What are some things you’d like to know? 

Weigh in with a comment.

About Author

Sterling White

With just under a decade of experience in the real estate industry, Sterling currently manages over $10MM in capital, which is deployed across a $26MM real estate portfolio made up of multifamily apartments and single-family homes. Through the company he co-founded, Holdfolio, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single-family investing and apartment investing to wholesaling and scaling a business.


    • Sterling White

      I will be unable to provide a definite answer to your first question, but it would make sense for the seller to have financials showcasing the properties income in order to file their taxes. If they do not have a T-12 try to get a T-3. Obtaining a updated rent roll will help paint a clearer picture as well.

      Hope that helps. Best of luck.

  1. John Barnette

    Exchanged up from a SF condo to little 8 unit in a further out C class kind of area. Underwriting the loan much harder. Even with 800 fico, 20 years landlord experience (though no commercial), 30-35% preferred down. Had to switch to a second lender at quite a cost and get 2nd appraisal and up it to 40% down. Cap around 4.5%.

    Insurance costs and availability. Much more difficult and expensive. Current carrier for seller who had the building for 40 yrs was not writing a new policy. Existing carrier for 9 other properties, 2 cars, and umbrella policy would not do it. Got it done but expensive and the building is excluded from my “umbrella” policy. Damn.

    Trash collection seems too high comparred to what I pay in same community for a sfr.

    All not bad and worth it. So far

  2. Mara Penfil

    Thanks for the article Sterling! I’ve been doing a lot of research and am preparing to invest in a multifamily property. At first, I was looking at duplex’s but since have been considering something in the range of 6 units, and your article reminded me to be aware of how utilities are handled with smaller vs larger properties.

  3. Matt NA

    Always be aware that listing agents will try to push the pro forma rents. You need to do your own homework there. Also be aware of your competing buildings in the area with what they may be getting for rent vs. condition and vacancies. Sometimes bumping rents will just get you empty units, but if the competing buildings are all full and with higher rents that’s (one) good indicator for potential success.

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