Multifamily Investing Guide
Every multifamily acquisition decision comes down to five numbers: NOI, cap rate, DSCR, cash-on-cash return, and IRR. This guide explains what each metric means, how to calculate it, what thresholds to look for, and how they work together to tell you whether a deal is worth pursuing.
NOI is the foundation of every other metric. It tells you how much money the property generates after operating expenses but before debt service (mortgage payments).
Expense ratio: Operating expenses as a percentage of EGI. For multifamily, 40-50% is typical. Below 35% may mean the seller is underreporting expenses (or self-managing and not accounting for management cost). Above 55% suggests operational issues or deferred maintenance.
Pro forma vs actual: Brokers often present "pro forma" NOI that assumes lower vacancy, higher rents, or reduced expenses. Always underwrite based on trailing 12-month (T12) actuals, not pro forma projections.
Management fee: Even if the current owner self-manages, include a management fee (typically 5-8% of EGI) in your underwriting. You might self-manage today, but your model should reflect the cost of professional management.
The capitalization rate measures the property's unlevered yield — what you'd earn if you paid all cash. It's the most common metric used to compare deals and to estimate property value.
It depends entirely on the market and asset class. Cap rates compress (go lower) in high-demand markets and for newer, stabilized properties. They expand (go higher) for older properties, secondary markets, and value-add opportunities.
A cap rate significantly above market average is a signal to investigate, not celebrate. There's usually a reason the market is pricing the property cheaply.
DSCR tells you how comfortably the property's income covers its mortgage payments. It's the metric lenders care about most, and it's the one that tells you whether you'll sleep well at night.
DSCR is sensitive to interest rates. The same property at 5.5% vs 7.0% can swing from a comfortable 1.35 to a tight 1.10. Always stress-test at higher rates.
Cash-on-cash measures the annual return on the actual cash you invest — your down payment plus closing costs. Unlike cap rate, it accounts for leverage.
Cash-on-cash is a year-one metric. It doesn't account for principal paydown, appreciation, or rent growth over time. That's what IRR is for.
IRR is the most comprehensive return metric. It accounts for the time value of money across the entire hold period: your initial investment, annual cash flows, and the eventual sale proceeds.
You can't calculate IRR with a simple formula — it requires iteration (or a financial calculator). The inputs are:
IRR is sensitive to assumptions about rent growth, exit cap rate, and hold period. A deal that shows 18% IRR with 5% annual rent growth might show 11% with 2% growth. Always check the assumptions behind the number.
No set of assumptions is perfectly accurate. Vacancy could be higher than expected. Rents could grow slower. Interest rates could change. Sensitivity analysis shows you what happens to your returns when key assumptions shift.
Run your model at multiple vacancy rates: 3%, 5%, 8%, 12%, 15%. At what vacancy rate does the deal stop cash-flowing? This is your break-even occupancy — one of the most important numbers in any underwriting. If break-even occupancy is 92% and the market average is 94%, you have a 2% cushion. If break-even is 97%, you're one bad quarter away from negative cash flow.
What happens if rents don't grow at 3% per year? Run the model at -5%, 0%, +2%, +3%, +5%, and +10%. This is especially important for your IRR calculation, since IRR compounds over the hold period and is highly sensitive to growth assumptions.
If you're using floating-rate debt or plan to refinance, model the deal at your expected rate, +50bps, +100bps, and +200bps. The deal that works at 6% might not work at 7.5%.
No single metric tells the whole story. Here's how experienced multifamily investors typically use these metrics together:
Look at cap rate and price per unit first. If the cap rate is below your minimum threshold for the market, or the price per unit is above comparable sales, move on. Don't waste time underwriting a deal that fails the basic smell test.
Calculate NOI from the T12 or OM financials. Apply your own vacancy and expense assumptions (not the broker's). Calculate DSCR at current financing terms. If DSCR is below 1.20, the deal probably doesn't work with conventional debt.
Build the full model with cash-on-cash, IRR projections, and sensitivity tables. This is where you model the value-add business plan: what happens to returns if you renovate units and raise rents by $150/month? What if only 60% of units turn over in year one instead of 80%?
A deal typically gets a "go" when it hits all of these:
If you have an offering memo, T12, or rent roll, you can run this entire analysis in about 2 minutes. Dealyze reads the PDF, extracts all the financial data, and calculates every metric covered in this guide — NOI, cap rate, DSCR, cash-on-cash, IRR, sensitivity tables, and a Go/Caution/No-Go verdict.
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Use this as a quick reference when screening deals:
Upload any offering memo, T12, or rent roll. Dealyze extracts the data and runs the full underwriting model — NOI, cap rate, DSCR, cash-on-cash, IRR, sensitivity analysis, and a Go/No-Go verdict.