Getting into Commercial Real Estate – Understanding Underwriting & Value-Add Strategy

Simandu Yakubov · 2025-03-07T09:10:05-08:00

Hey everyone, I've been investing in single-family homes (SFH) for some time and have completed 13 deals. I'm now looking to scale into commercial multifamily properties and want to ensure I fully understand how to underwrite and maximize value in the CRE space. One thing I've been wondering—when a seller advertises a pro forma, are they typically pricing the property based on existing NOI or the projected NOI after improvements? Would buying at projected NOI take away from the value-add strategy of commercial real estate? Also, suppose I find a multifamily property where the current NOI is not at full capacity (due to below-market rents, vacancies, deferred maintenance, etc.), and I go in and rehab, raise rents, and increase NOI—would my new property value be determined by applying the area's average cap rate to my new NOI? If so, could I then use that to support a cash-out refinance, allowing me to recycle my capital and scale up? I want to make sure I’m digging into the right numbers when underwriting. How do you break down all the potential costs, earnings, vacancies, maintenance, and other key factors to ensure you’re making an accurate and profitable investment decision? I'd love to hear from investors who have successfully transitioned from SFH to commercial multifamily. Any tips, insights, or strategies would be greatly appreciated! If anyone here has extensive experience in the commercial multifamily space and would be open to mentorship, I would greatly appreciate the opportunity to learn from someone who has successfully navigated this industry. I'm eager to absorb as much knowledge as possible, fine-tune my underwriting skills, and build a strong foundation in CRE investing. I am extremely committed to long-term success, and I would love to connect with a mentor who is willing to share insights and guidance. Looking forward to your thoughts. Thanks!

Robert Rixer

Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes

1y

Congrats on the SFH's. Your theory on the multifamily is correct however in practice in today's market conditions, it can vary wildly. Few properties these days will support a full cash-out, most won't even get a partial cash-out. Sellers expect to take a good amount of the upside, even if their rents are low.

For someone who is coming into this new, you will likely be taken aback by how little these deals make sense.

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Simandu Yakubov
OP
Member since 2024 · 5 posts · 3 votes
1y
Quote from @Robert Rixer:

Congrats on the SFH's. Your theory on the multifamily is correct however in practice in today's market conditions, it can vary wildly. Few properties these days will support a full cash-out, most won't even get a partial cash-out. Sellers expect to take a good amount of the upside, even if their rents are low.

For someone who is coming into this new, you will likely be taken aback by how little these deals make sense.

Hi Robert,

I appreciate your response and insights. If I come across a distressed multifamily property with significant potential and the seller is willing to sell at a substantial discount, would my strategy hold up in this scenario? Specifically, if the property requires full rehabilitation and currently has no rental income, once I complete the renovations, stabilize the asset, and generate competitive returns, would this successfully support my cash-out refinance value-add approach?
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Robert Rixer
Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
1y
Quote from @Simandu Yakubov:

Quote from @Robert Rixer:

Congrats on the SFH's. Your theory on the multifamily is correct however in practice in today's market conditions, it can vary wildly. Few properties these days will support a full cash-out, most won't even get a partial cash-out. Sellers expect to take a good amount of the upside, even if their rents are low.

For someone who is coming into this new, you will likely be taken aback by how little these deals make sense.

Hi Robert,

I appreciate your response and insights. If I come across a distressed multifamily property with significant potential and the seller is willing to sell at a substantial discount, would my strategy hold up in this scenario? Specifically, if the property requires full rehabilitation and currently has no rental income, once I complete the renovations, stabilize the asset, and generate competitive returns, would this successfully support my cash-out refinance value-add approach?
Yes the theory is sound. Every deal has it's own unique variables but this strategy would generally work. It's all about finding a deal like this.
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Charles Seaman

Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes

1y

@Simandu Yakubov You asked many good, thought provoking questions.

If a seller or broker advertises pro forma, then they are typically pricing the property based on that with the hope of finding a buyer who's willing to bite off on it. Buying it based on the pro forma NOI would take away from the value-add strategy because you're essentially paying the seller for the work that you will do and for the increased NOI that you will generate.

If you find a multifamily property where the current NOI is not at full capacity and you increase the NOI, then the value is determined by applying the area's average cap rate to your new NOI. Keep in mind that the cap rate could change from the time that you buy the property until you go to refinance it, so this could impact your proceeds. Assuming that the cap rate compresses because of favorable market conditions, then this will work to your advantage. If it decompresses because of unfavorable market conditions, then it could potentially work against you.

I typically double check the operating expense numbers I use with property management companies who know the area well. I recommend getting an insurance indication from an insurance broker, a debt term sheet from a mortgage broker, and property tax guidance from either the county tax assessor or a real estate tax consultant. Taxes and insurance will typically be the biggest variables in any deal that you underwrite.

I'd be glad to speak with you further about it if you have any questions. I used to host a free weekly session that taught people how underwrite multifamily deals, so I can probably give you some pointers.

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Simandu Yakubov
OP
Member since 2024 · 5 posts · 3 votes
1y
Quote from @Charles Seaman:

@Simandu Yakubov You asked many good, thought provoking questions.

If a seller or broker advertises pro forma, then they are typically pricing the property based on that with the hope of finding a buyer who's willing to bite off on it. Buying it based on the pro forma NOI would take away from the value-add strategy because you're essentially paying the seller for the work that you will do and for the increased NOI that you will generate.

If you find a multifamily property where the current NOI is not at full capacity and you increase the NOI, then the value is determined by applying the area's average cap rate to your new NOI. Keep in mind that the cap rate could change from the time that you buy the property until you go to refinance it, so this could impact your proceeds. Assuming that the cap rate compresses because of favorable market conditions, then this will work to your advantage. If it decompresses because of unfavorable market conditions, then it could potentially work against you.
I typically double check the operating expense numbers I use with property management companies who know the area well. I recommend getting an insurance indication from an insurance broker, a debt term sheet from a mortgage broker, and property tax guidance from either the county tax assessor or a real estate tax consultant. Taxes and insurance will typically be the biggest variables in any deal that you underwrite.
I'd be glad to speak with you further about it if you have any questions. I used to host a free weekly session that taught people how underwrite multifamily deals, so I can probably give you some pointers.

Hi Charles, I appreciate you taking the time to respond. I sent you a private message, looking forward to connecting with you!
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Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

1y

@Simandu Yakubov, there is no consistency when it comes to broker packages, but I will note that the brokers goal is to maximize the sale price for the seller.

That being said, for priced deals, the list price is often somewhere in the middle. It is higher than the T-12 numbers can really support, but still leave something for the buyer. Additionally, while the proforma rents are reasonably easy to determine, the proforma expenses are quite commonly based on T12, and not achievable in reality, specifically insurance and taxes. Some brokers are good about adjusting taxes to post sale numbers, but many do not. And insurance is a major hurdle in many markets these days, where premiums are growing 15-20% per year.

As for a refi: technically yes, but refi's are notoriously conservative, since there is no arms length transactions. I have had lenders tell me I have "above market" lease rates, below market expenses, and then you get into the cap rate question. So, not to say this will be your experience, but as others noted, not only do markets move in 12-24 months, but even your actual numbers can be up for debate. But in theory, if there is enough movement on NOI, then yes, you could refi and recycle that capital.

Generally, as you are getting started, your three main sources of information will be brokers themselves (while they may be painting an optimistic picture, the good ones are still in reality), lenders (many loan brokers will happily take a look at a deal you are considering and throw it into their quick calculators, again giving you some ideas as what numbers they expect to see), and property managers (these are the front lines who are controlling your expenses and revenues, so typically provide the best info).

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Simandu Yakubov
OP
Member since 2024 · 5 posts · 3 votes
1y
Quote from @Evan Polaski:

@Simandu Yakubov, there is no consistency when it comes to broker packages, but I will note that the brokers goal is to maximize the sale price for the seller.
That being said, for priced deals, the list price is often somewhere in the middle. It is higher than the T-12 numbers can really support, but still leave something for the buyer. Additionally, while the proforma rents are reasonably easy to determine, the proforma expenses are quite commonly based on T12, and not achievable in reality, specifically insurance and taxes. Some brokers are good about adjusting taxes to post sale numbers, but many do not. And insurance is a major hurdle in many markets these days, where premiums are growing 15-20% per year.
As for a refi: technically yes, but refi's are notoriously conservative, since there is no arms length transactions. I have had lenders tell me I have "above market" lease rates, below market expenses, and then you get into the cap rate question. So, not to say this will be your experience, but as others noted, not only do markets move in 12-24 months, but even your actual numbers can be up for debate. But in theory, if there is enough movement on NOI, then yes, you could refi and recycle that capital.
Generally, as you are getting started, your three main sources of information will be brokers themselves (while they may be painting an optimistic picture, the good ones are still in reality), lenders (many loan brokers will happily take a look at a deal you are considering and throw it into their quick calculators, again giving you some ideas as what numbers they expect to see), and property managers (these are the front lines who are controlling your expenses and revenues, so typically provide the best info).

Got it, makes sense. Brokers aim to maximize the sale price, so it’s on us to dig into the numbers, especially with pro forma expenses often based on T-12 while rents are projected higher. Taxes and insurance hikes are definitely something to watch. Refis being conservative also makes sense, so planning ahead is key. I appreciate the insight—thanks for sharing!
1 Reply

Kushaal Malde

Lender · San Francisco · Member since 2019 · 113 posts · 49 votes

1y

@Simandu Yakubov welcome to the commercial world. You've received a lot of great pointers here from the other posters in this thread. I work as a Commercial Mortgage Broker and would love to connect if you have a sample deal you wanted to get some debt quotes on!

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Arman AhmedPro Member

Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 941 votes

1y

@Simandu Yakubov

Hey Simandu,

Congrats on making the jump from SFH to commercial multifamily! It's a big step, but definitely the right move for scaling up.

To your first question—most sellers price their properties based on projected (pro forma) NOI rather than actual NOI. This can be a bit misleading because it assumes all rent increases and improvements have already happened. If you buy at projected NOI, you're basically paying for value that you still have to create, which makes it harder to execute a solid value-add strategy. Ideally, you want to buy based on the current NOI and then force appreciation through rent increases, renovations, and better management.

And yes, you're thinking about valuation the right way—when you increase NOI by raising rents, reducing expenses, or filling vacancies, the property's value goes up based on the local cap rate. That's how investors use the BRRRR method at a larger scale—buy, improve, refinance, and pull out capital to reinvest in the next deal.

For underwriting, I’d focus on:

• Market rents vs. current rents – How much room is there to increase?

• Vacancy & turnover costs – Can you realistically keep units full?

• CapEx (big-ticket repairs) – Are there hidden costs (roof, HVAC, plumbing)?

• Operating expenses – Are they in line with industry standards?

• Financing terms – Will the bank see the same value you do?

I work with a lot of investor clients and would be happy to connect if you ever want to bounce ideas or go over a deal together. Let’s stay in touch!

[email protected]614-418-6081

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Getting into Commercial Real Estate – Understanding Underwriting & Value-Add Strategy

Getting into Commercial Real Estate – Understanding Underwriting & Value-Add Strategy

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