Most investors overthink deal analysis. The core question is simple: does this property generate enough income to cover expenses, service debt, and produce a return worth your capital? Here's the framework.
Every multifamily deal analysis follows the same structure, whether it's a 4-unit or a 200-unit property:
Start with the rent roll. For each unit, you need:
Calculate Gross Potential Rent (GPR) — total annual income if every unit is occupied at market rent. Then subtract vacancy and credit loss (typically 5-8% for stabilized properties, higher for value-add).
Effective Gross Income =
GPR + Other Income − Vacancy Loss − Credit Loss
Red flag: If the seller's proforma assumes 2-3% vacancy in a market that averages 7%, they're inflating income. Always use your own assumptions.
Operating expenses typically fall into these categories:
Expense ratio benchmark: Total operating expenses should be 40-55% of EGI for most multifamily properties. If the seller shows 30%, they're hiding something or self-managing without accounting for their time.
Expense Ratio =
Total Operating Expenses ÷ Effective Gross Income
Net Operating Income is the single most important number in multifamily. It tells you what the property earns before debt service:
NOI =
Effective Gross Income − Total Operating Expenses
NOI does NOT include debt service, capital expenditures (one-time), depreciation, or income taxes. It's a property-level metric, independent of how you finance it.
The capitalization rate converts NOI into property value:
Value = NOI ÷ Cap Rate
Cap Rate = NOI ÷ Purchase Price
Cap rate benchmarks vary by market and property class:
If a 20-unit property generates $120,000 NOI and market cap rates are 6.5%, the property is worth approximately $1,846,000. If the seller is asking $2.2M, you're overpaying — unless you can increase NOI through rent raises or expense reduction.
Cap rate tells you property performance. Cash-on-cash tells you return on YOUR money:
Annual Cash Flow = NOI − Annual Debt Service
Cash-on-Cash = Annual Cash Flow ÷ Total Cash Invested
Total cash invested includes: down payment + closing costs + any immediate repairs/capex.
Benchmark: Most investors target 8-12% cash-on-cash in year one. Below 6% and you might be better in a REIT. Above 15% and double-check your assumptions — the deal may be riskier than you think, or your expense estimates are too low.
Before spending 30 minutes on detailed analysis, screen deals with these instant disqualifiers:
Follow five steps: verify gross income, estimate expenses (40-55% of EGI benchmark), calculate NOI, apply cap rate for valuation, and calculate cash-on-cash return based on your financing.
Depends on class and market. Class A: 4-5.5%. Class B: 5.5-7%. Class C: 7-9%+. Higher cap rates mean higher yields but typically more risk or management intensity.
40-55% of effective gross income for stabilized properties. Below 35% likely means the seller is understating costs.
Most investors target 8-12% in year one. Below 6% may not justify the effort vs. passive alternatives. Above 15% warrants extra scrutiny on your assumptions.
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