Multifamily Underwriting Checklist: What to Analyze Before You Buy

Phase 1: Operating Memorandum Review

The OM is a marketing document — not a financial statement. Your first pass is about understanding the deal structure and identifying what you need to verify independently.

Phase 2: Rent Roll Analysis

The rent roll is the single most important document in the deal. Analyze it unit by unit.

• Lease expiration distribution — map out when leases expire. A cliff where 30–40% expire within 60 days of your projected close creates immediate re-leasing risk and potential vacancy exposure.
• Month-to-month concentration — a high share of MTM leases often means the seller has been deferring renewals to make the property appear to have more upside. It also means you could face significant turnover shortly after close.
• Below-market rents — quantify the loss-to-lease precisely. Determine whether below-market rents reflect upside opportunity, rent control restrictions, tenant quality issues, or deferred maintenance keeping the property from commanding market rates.
• Concessions and free rent — any concessions buried in leases (free months, reduced deposits) should be noted and factored into your effective rent calculation.
• Occupied vs. vacant units — verify that the occupancy snapshot in the OM matches the rent roll. A building shown as 95% occupied in the executive summary should have 95% of units with active leases on the rent roll.

Phase 3: T12 Financial Verification

Never underwrite a deal without reviewing actual trailing financials. Request T12 statements directly from the seller — ideally two to three years of annual operating statements. Compare every line to the OM.

Phase 4: NOI and Cap Rate Analysis

With verified income and expenses, rebuild NOI from scratch and assess the deal's pricing.

Phase 5: Debt and DSCR Analysis

A deal that pencils at the right cap rate can still be a bad investment if it cannot be financed on acceptable terms. Model the debt before you get attached to the deal.

• Loan sizing — determine the maximum loan amount a lender will approve based on DSCR requirements (typically 1.25x minimum). Back into the required equity: purchase price minus max loan equals minimum down payment.
• DSCR calculation — divide your underwritten NOI by annual debt service (monthly payment times 12). The 1.25x rule is standard: most agency lenders (Fannie Mae, Freddie Mac) require 1.25x DSCR at underwriting. Below 1.20x, expect lender pushback or higher rates.
• Interest rate sensitivity — model the deal at today's rate and at a rate 150 basis points higher. If DSCR falls below 1.10x in the stress scenario, you have limited cushion against rate increases at refinance.
• Balloon risk — most commercial multifamily loans have 5 or 7-year terms with 25–30-year amortization. Model the remaining loan balance at maturity and assess whether projected NOI and market cap rates will support a refinance without requiring additional equity.
• Loan-to-value — confirm the LTV is within lender guidelines. Most conventional multifamily loans cap at 75–80% LTV, with agency loans for qualifying properties going to 80%.

Phase 6: 5-Year Hold IRR and Exit Modeling

Cap rate and DSCR tell you about today. IRR tells you whether the entire investment — including entry cost, annual cash flows, and sale proceeds — makes financial sense over your hold period.

• Annual cash flow — for each year in the hold, calculate NOI minus debt service. This is your pre-tax cash flow. Sum these for the hold period.
• NOI growth assumptions — model rent growth of 2–3% annually as a conservative baseline. Expense growth typically tracks inflation at 2–3%. The spread between rent growth and expense growth drives NOI improvement.
• Exit value — estimate the sale price at the end of your hold period by dividing projected exit-year NOI by an assumed exit cap rate. Be conservative: assume the exit cap rate is the same as or higher than your entry cap rate. Do not underwrite to cap rate compression.
• Net sale proceeds — exit value minus remaining loan balance minus selling costs (typically 4–6% of sale price for broker and closing fees) equals your equity at exit.
• IRR calculation — the IRR is the discount rate that makes the net present value of all cash flows (initial equity investment as a negative, annual cash flows, and exit proceeds) equal to zero. Target IRRs vary by strategy: 12–15% for core-plus value-add, 16–20%+ for heavy value-add or opportunistic.
• Equity multiple — total distributions divided by total invested equity. A 1.5x equity multiple on a 5-year hold is modest; 2.0x or higher over 5 years indicates strong performance.

Phase 7: Questions to Ask the Broker

A prepared buyer who asks specific, financially-informed questions signals to the broker that they will not overpay based on headline numbers. These questions also surface information that is material to your underwrite but not included in the OM.

• Can you provide two to three years of actual operating statements, not just the trailing 12?
• What is the current physical occupancy by unit type, as of today?
• When were the roof, HVAC systems, plumbing, and electrical last replaced or upgraded?
• Are there any known deferred maintenance items or upcoming capital expenditure needs?
• Has the property received any code violation notices or open permits in the past five years?
• Are any units currently under eviction proceedings or with outstanding rent balances?
• Will property taxes be reassessed upon sale, and at what rate?
• What is the seller's primary motivation for selling, and what is their timing flexibility?
• How many offers have been received, and what is the expected timeline to contract?
• Are there any pending or proposed rent control ordinances in this jurisdiction?

Key Benchmarks at a Glance

When to Walk Away

No checklist item is more important than knowing when a deal does not work. Walk away when:

• The broker will not provide T12 financials or actual operating statements
• Your independently rebuilt NOI is more than 15% below the broker's NOI and the seller will not renegotiate price
• DSCR at current rates falls below 1.10x with no clear near-term path to improvement
• The property condition assessment reveals deferred maintenance that would eliminate projected cash flow in years one through three
• The deal only works at pro forma rents that require a full rent-up of vacant units or major renovation units before cash flow turns positive
• The IRR on your conservative scenario (flat rents, stable cap rate) is below your hurdle rate

Discipline in underwriting is how investors build wealth in multifamily over time. The deals you pass on are often more valuable than the ones you buy.