Small Multifamily Deal Analysis

[Kyle Trotman]

For those actively buying small multifamily (5-20 units), what do you use to preemptively underwrite deals before getting full financials? For an initial “back of a napkin” calculation I would request an offering package from the seller or broker. From there, I calculate the assumed operating expenses will be around 50% of gross income. From this I dived the gross income by 2 (50%) to get a rough NOI. From here , dividing that into the asking price of the property will give me a cap rate. I generally see what the cap rate of this property is in comparison to similar class properties in the area as well as if any value add opportunities can be created. Is there any online calculator I can use to simplify underwriting of a property once making a determination if the property is worth delving deeper on? I understand a mortgage broker will help substantially in giving insight into underwriting from the perspective of a lender, however I would also like to underwrite properties on my own in terms of a full investment analysis. Any insight into this would be much appreciated. Thanks in advance.

[Ebonie Beaco]

This starting point is very similar to how I personally screen deals as both a mortgage loan officer and a real estate investor. The 50% expense rule is a useful shortcut, but in real underwriting I regularly see expenses fall anywhere between 40% and 60% depending on the property, management, and how utilities are structured. From my experience on both the lending side and the investing side, this is how I pre-underwrite small multifamily before I ever see full financials.

I adjust the expense ratio instead of defaulting to 50%. I use 50% as a quick filter, but I refine it based on the asset. For newer or well-maintained properties I might assume 40 to 45%. For older or C-class buildings I am usually closer to 50 to 55%. If the owner pays utilities or there is deferred maintenance, I go higher. Small adjustments here can materially change NOI and the real cap rate.

I always verify rents. Broker numbers are a starting point, not the final answer. I check Rentometer, Apartments.com, Zillow comps, and when possible I talk to local property managers. If rents are below market, that can signal upside. If they are already at market, the deal needs to stand on its own numbers.

I also run a lender style DSCR check even if the buyer is not using DSCR financing. I will assume around 70 to 75% LTV, plug in a realistic rate for the current market, and look for a DSCR of 1.20 or higher. If it barely hits 1.0, the deal is usually thin unless there is a clear value add opportunity.

Vacancy and reserves are areas where many investors get too optimistic. I rarely assume less than 8% vacancy on small multifamily because real life rarely matches the offering memo. I also factor in CapEx and reserves early, even if it is a rough estimate, so there are fewer surprises later.

For quick screening I look at cap rate compared to local norms, price per unit versus similar properties, and a rough cash on cash return. If two of those are weak, I typically pass and move on. For simplifying analysis, many investors use BiggerPockets calculators, DealCheck, and PropertyMetrics. They are useful for running scenarios quickly without building a full spreadsheet every time.

At the early stage, the goal is not perfect underwriting. The goal is to filter efficiently. If a deal works under conservative assumptions, it is worth digging into. If it only works with optimistic projections, both lenders and experienced investors will view it as higher risk.

The investors who do well long term are the ones who can analyze deals independently and also understand how a lender will view the same numbers. That usually leads to stronger acquisitions and smoother financing. If helpful, I can share a quick prescreen checklist that many investors use before requesting full financials. It saves time and helps avoid chasing marginal deals.