How to Underwrite a 5–20 Unit Multifamily Deal (Without Losing a Weekend)
Short answer: To underwrite a 5–20 unit multifamily deal, triangulate the rent roll against market rent, build a defensible expense ratio (realistically 40–50% of income once you reload management and reserves), compute NOI, cap rate, and DSCR, stress-test a down case, then write a one-page summary for your agent, partner, and lender.
The 5–20 unit space is the most under-served corner of multifamily. Too small for institutional brokers, too big for residential underwriting templates. Here's the workflow we use — and the one PathIQ automates — to get from "I just got the OM" to "I have a defensible offer" in under an hour.
Step 1 — How do you verify a seller's rent roll?
The seller's rent roll is a marketing document. Before you accept any income line, do three checks:
- Compare to market rent. A unit at $1,100 in a $1,400 market is upside; a unit at $1,500 in a $1,200 market is a problem.
- Look for concessions. "$1,300 + 1 month free" is $1,192/mo, not $1,300/mo.
- Identify long-term tenants. A tenant 6 years deep at below-market rent is a tenure premium you can't legally evict away.
Step 2 — What expense ratio should you use for small multifamily?
Sellers love to show 25–30% expense ratios. For 5–20 unit assets, the realistic floor is closer to 40–50% once you reload reserves and management. Standard line items:
- Property tax (re-assessed at sale price in many states)
- Insurance (rising 15–30% YoY in storm states)
- Utilities (especially if owner-paid water)
- Repairs & maintenance: $500–$700/unit/yr minimum
- CapEx reserves: $250–$300/unit/yr
- Management: 8–10% of EGI even if self-managed
- Vacancy: 5–8% economic vacancy
Step 3 — Compute NOI, cap rate, and DSCR
NOI = effective gross income − operating expenses. From there:
- Cap rate = NOI / purchase price.
- DSCR = NOI / annual debt service.
If you're paying 7% in a market with 6% caps, you have negative leverage — the loan reduces your cash-on-cash return. That's not always a no, but it has to be a conscious yes.
Step 4 — Stress-test it
Walk through three scenarios:
- Base: as underwritten.
- Down: −10% rents, +20% insurance, vacancy 10%.
- Up: rents to market in 18 months.
If DSCR is below 1.10 in the down case, you have no margin for surprise. Pass, or restructure.
Step 5 — Write the one-pager
Your buyer's agent, your equity partner, and your lender all want the same one-pager: address, units, NOI, cap, DSCR, debt structure, day-1 cash, year-3 cash. PathIQ generates this automatically once you enter the deal — that's the whole product, really.
The point isn't speed for speed's sake. It's that when you can underwrite five deals in the time you used to spend on one, you can afford to be picky. And being picky is the whole game in 5–20 unit multifamily.
Frequently asked questions
How do you underwrite a small multifamily deal step by step?
Start by triangulating the rent roll against market rent and stripping out concessions, then build a defensible expense ratio, compute NOI, cap rate, and DSCR, stress-test a down scenario, and finish with a one-page summary. The whole workflow can take under an hour once the numbers are organized.
What expense ratio is realistic for a 5–20 unit property?
Sellers often show 25–30%, but for 5–20 unit assets the realistic floor is closer to 40–50% once you reload management and reserves. Standard line items include property tax (often re-assessed at the sale price), insurance, utilities, repairs and maintenance, CapEx reserves, management, and economic vacancy.
Why shouldn't I trust the seller's rent roll?
The seller's rent roll is a marketing document. Before accepting any income line, compare each rent to the market, adjust for concessions like a free month, and flag long-term tenants sitting well below market — those rents are a tenure premium you can't quickly raise.
How do I stress-test a multifamily deal?
Run three scenarios: a base case as underwritten, a down case (for example −10% rents, +20% insurance, and 10% vacancy), and an up case where rents reach market. If DSCR falls below 1.10 in the down case, you have no margin for surprise and should pass or restructure.
What is negative leverage in a multifamily deal?
Negative leverage happens when your interest rate is higher than the property's cap rate — for example, paying 7% in a market with 6% caps. In that case the loan actually reduces your cash-on-cash return. It's not automatically a dealbreaker, but it has to be a conscious decision.