How to Analyze a Multifamily Property: A Step-by-Step Calculation Guide

Multifamily properties are a cornerstone of many commercial real estate portfolios, prized for their resilient demand and scalable income streams. But a successful multifamily investment hinges on a rigorous and detailed analysis process. How do you go from a broker's marketing package to a confident investment decision? This guide provides a comprehensive, step-by-step walkthrough of how to analyze an apartment building, complete with a worked example of a 24-unit property. We'll cover everything from the rent roll to the final risk assessment.

Why Multifamily Analysis is Unique

While the core principles of CRE analysis apply, multifamily has unique characteristics. Unlike a single-tenant retail property, you're managing dozens (or hundreds) of individual leases. This diversification is a strength, but it also means you must pay close attention to metrics like unit mix, loss-to-lease, and physical vacancy vs. economic vacancy.

The Multifamily Analysis Process: A 24-Unit Example

Let's underwrite a hypothetical 24-unit apartment building. The seller has provided a rent roll and a T-12 financial statement. The asking price is $3,000,000.

Step 1: Deconstruct the Rent Roll

The rent roll is your primary source of truth for income. It should detail each unit, its size, current rent, and lease expiration date. Your first task is to compare the *actual* in-place rents to the *market* rents for similar units in the area. This identifies potential "loss-to-lease" (a value-add opportunity) or highlights units that are over-rented and may not renew.

Step 2: Calculate Gross Potential Income (GPI)

GPI is the total income if the property were 100% occupied at market rents, plus other income. Let's assume our 24-unit building has an average market rent of $1,400/month per unit and $6,000 in annual laundry/parking income.

(24 units * $1,400/month * 12 months) + $6,000 = $403,200 + $6,000 = $409,200 (GPI)

Step 3: Account for Vacancy and Credit Loss

No property is 100% full all the time. You must subtract an allowance for vacancy (unoccupied units) and credit loss (tenants who don't pay). A conservative estimate is typically 5-7% of GPI for a stabilized property. Let's use 5%.

$409,200 (GPI) * 5% = $20,460 (Vacancy/Credit Loss)

Effective Gross Income (EGI) = $409,200 - $20,460 = $388,740

Step 4: Subtract Operating Expenses to Get NOI

Now, we subtract all the costs to run the property. Use the historical T-12 statement as your guide, but adjust for any known changes (e.g., property taxes will be reassessed upon sale). A typical expense ratio for multifamily is 40-50% of EGI. Let's assume total operating expenses are $174,933 (a 45% expense ratio).

$388,740 (EGI) - $174,933 (OpEx) = $213,807 (NOI)

This is the single most important number. Our NOI Builder can help you itemize these expenses accurately. For a comprehensive breakdown, see our NOI calculator guide.

Step 5: Calculate Cap Rate for Valuation

Using the asking price, we can now find the cap rate.

$213,807 (NOI) / $3,000,000 (Price) = 7.13% Cap Rate

You would compare this 7.13% cap rate to recent sales of similar apartment buildings in the area to determine if the price is fair. Use our Cap Rate Calculator for this. Learn about typical cap rates by property type for better context.

Step 6: Analyze Returns with Financing

Let's assume we get a loan with a 25% down payment ($750,000) and our annual debt service is $145,000. Our total cash invested is the down payment plus, say, $60,000 in closing costs, totaling $810,000.

Annual Cash Flow = $213,807 (NOI) - $145,000 (Debt Service) = $68,807

Cash-on-Cash Return = $68,807 / $810,000 (Cash Invested) = 8.5%. You can model this with the Cash-on-Cash Calculator.

Step 7: Check DSCR for Loan Qualification

Does our deal meet lender requirements? We need to check the DSCR.

DSCR = $213,807 (NOI) / $145,000 (Debt Service) = 1.47x. This is well above the typical 1.25x minimum, so the property can easily support the loan. Run scenarios with our DSCR Calculator.

Step 8: Calculate Breakeven Occupancy

Finally, let's assess the risk. What's our margin of safety?

Breakeven Occupancy = ($174,933 OpEx + $145,000 Debt) / $409,200 GPI = 78.2%. This means as long as ~78% of the property is occupied, we can pay all our bills. This is a healthy cushion. Calculate yours with the Breakeven Occupancy Calculator. For more on this metric, check our breakeven occupancy guide.

Full Calculation Breakdown

Red Flags in Multifamily Deals

Analyzing a multifamily property is a methodical process. By breaking it down into these steps and verifying each number, you can move past the sales pitch and make a decision based on sound financial fundamentals.