Updated
Written by Jason Taken, Principal, Jaken Finance Group.
To underwrite your first five-unit multifamily purchase, verify the income and legal units, reconstruct operating expenses, budget repairs and reserves, calculate debt payments and buyer cash, then test the deal under a realistic downside. Your goal is an investment decision supported by records. A listing’s cap rate and a lender’s preliminary loan amount are starting points.
Five apartments concentrate vacancy and repair risk. One empty unit represents 20% of physical capacity when units are equally sized, but its share of rent can differ. A roof, boiler or insurance increase also affects only five units’ income. Your model must show those exposures before you choose a price.
Use the calculator below with the worked example. Download the five-unit underwriting spreadsheet and printable diligence worksheet to build your own file. All example prices, rents, loan terms and thresholds are hypothetical, not market quotes or financing offers.
1. Establish what you are actually buying
Confirm the address, parcel, building configuration and five legal residential units. Compare the seller’s description with leases, zoning, permits, occupancy records, assessment information and the property’s physical use. Ask the relevant local officials and your advisers to resolve discrepancies. Five doors or five leases do not independently establish five authorized apartments.
Identify parking, storage, laundry, utilities and any commercial space. Record whether the seller owns every parcel and whether access depends on another property. Verify utility metering and which bills belong to the landlord. A single master meter can materially change an otherwise attractive expense presentation.
Fannie Mae’s Small Mortgage Loan Program term sheet identifies existing, stabilized properties with five or more units as eligible collateral for that named program. It does not establish that your building qualifies or that an agency execution fits your loan size. The five-unit financing guide explains the lending transition after four units.
2. Build a source file before entering assumptions
Request the current rent roll, leases and amendments, trailing twelve months of income and expenses, current financial results, collections records, utility bills, tax information, insurance details and existing service contracts. Obtain the seller’s capital-work history and proposed purchase terms.
Date every source. Identify whether a number comes from a lease, accounting statement, bank record, invoice, estimate or your assumption. Keep the reporting periods consistent. A recent rent increase does not mean twelve months of collections occurred at that price.
Maintain a short exceptions list: missing lease, unexplained deposit, disputed unit count, unpriced roof work or insurance quote still pending. Assign each item a next action. A model with visible unknowns is more useful than a precise return built from numbers nobody can verify.
3. Reconcile the rent roll with actual collections
Use one row per unit. Record unit identifier, bedrooms, lease dates, contractual rent, concessions, deposits, delinquency and current occupancy. Keep resident names and sensitive information out of public worksheets or an initial financing inquiry.
Reconcile billed rent with cash collected and explain timing differences. A security deposit, prepaid rent or owner contribution is not ordinary recurring rental income. Separate rent owed from rent received. Review whether delinquent balances were subsequently collected rather than assuming they will all become cash.
Compare in-place rent with supported market rent, but maintain separate views. A vacant unit advertised at a higher rate is not evidence of a signed lease. Future increases may require turnover, improvements, notice or other local compliance. Base the acquisition decision on the period when those increases could realistically be earned.
4. Turn scheduled income into effective income
Scheduled rent is the contractual rental opportunity before vacancy and collection loss. Effective gross income, or EGI, reflects the income remaining after those losses, plus supported other income. Apply each adjustment once.
The example has five units averaging $1,800 monthly: $9,000 per month, or $108,000 annually. An assumed 8% rental loss removes $8,640. Add $1,200 of already collected annual other income to reach $100,560 EGI. The calculator applies vacancy only to scheduled rent because the other-income input is already net of loss.
Physical vacancy and economic loss measure different things. A fully occupied building can still have concessions or bad debt. Conversely, one unit vacant for three months is different from one vacant all year. Model the timing in a monthly budget if turnover is concentrated around closing.
5. Rebuild operating expenses for your ownership
Use the expenses you expect to pay after purchase. Review property taxes with the local assessment and transaction rules in mind; do not assume the seller’s current bill survives unchanged. Obtain an insurance indication covering the actual use and condition. Check deductibles, exclusions and required work.
Separate owner-paid utilities, recurring repairs, grounds or snow service, administration, professional fees and other costs. Review contracts for renewal increases and cancellation conditions. An expense omitted by a hands-on seller may still be necessary for you.
Include management even when you plan to self-manage, or show clearly what changes under that choice. Management compensation and your labor have an economic cost. The example uses 8% of EGI, an assumption that updates as collected income changes. Avoid mixing that fee with another allowance for the same service.
6. Distinguish NOI, capital work and cash reserves
Net operating income, or NOI, is property operating income before financing and income taxes. In this guide, recurring operating expenses reduce NOI. The replacement reserve is a separate deduction used to calculate net cash flow for the coverage and distribution tests.
The example’s fixed operating expenses total $33,000: taxes $15,000, insurance $5,000, utilities $6,000, recurring repairs $5,000 and other expenses $2,000. Management is $8,044.80. Subtract both from EGI to obtain $59,515.20 NOI. A separate $4,000 reserve produces $55,515.20 net cash flow.
Initial deferred work belongs in the acquisition budget. Ongoing repairs belong in operations. Future major replacements need a realistic allowance and a timing schedule. Do not include a roof replacement in three categories merely to be conservative, or omit it because it is technically capital expenditure. Reconcile the actual cash obligation.
7. Inspect the building and price deferred maintenance
Walk occupied units, vacant units, common areas, roof, structure, mechanical systems and exterior with the appropriate professionals. Confirm the scope and cost of identified issues before treating a seller credit as sufficient. Separate urgent safety or habitability work from optional improvements.
Get bids with scope, quantities, exclusions and timing. Ask what happens if hidden conditions expand the work. Include permit, design, disposal and contractor-mobilization costs where applicable. Understand whether tenants can remain during the work and how lost rent affects cash.
The example allocates $35,000 to initial repairs. That amount is an invented budget, not a five-unit rule of thumb. Your building’s condition can make a much larger number necessary. A small purchase discount cannot cure an unpriced structural problem or an uncertain approved use.
8. Calculate debt payments from the written structure
Request loan amount, interest basis, amortization, maturity, fees, prepayment provisions, guarantees, escrows and funding conditions. A five-year term with twenty-five-year amortization leaves principal due at maturity. An interest-only bridge needs a different payment and balance model.
The calculator uses fixed-rate monthly amortization. A hypothetical $500,000 loan at 7.5%, amortized over twenty-five years, requires approximately $44,339 annual principal and interest. This rate is an example input. Floating rates, daily accrual, interest-only periods and lender-specific conventions can produce different payments.
Taxes and insurance are already operating expenses here. Do not deduct them again by using a principal-interest-tax-insurance payment in the coverage denominator. Reconcile lender escrow collections to those expense lines and any separately funded closing reserves.
9. Read coverage and debt limits without relying on rounding
Debt-service coverage in this example is net cash flow divided by annual principal and interest: $55,515.20 ÷ $44,339.47, or approximately 1.2520 times. Lenders may define accepted NOI, reserves and debt differently. Compare their actual underwriting with your investment model.
Using an assumed 1.25 minimum coverage and 75% purchase LTV, the modeled limits are approximately $500,820 from cash flow and $562,500 from leverage. The lower is $500,820 before other constraints. Changing the rate, amortization, expense budget or reserve changes the result.
Those thresholds are editable illustrations. No automated approval is produced. A displayed 1.25 can conceal a true result below 1.25. Value, condition, borrower experience, liquidity, additional debt and program requirements can also lower proceeds even when this arithmetic fits.
10. Reconcile all buyer cash and measure the return
The down payment is only one part of the cash requirement. List purchase price, transaction costs, immediate work and additional operating cash. Identify which uses are actually funded by the loan and which must come from the buyer.
| Hypothetical purchase uses | Amount |
|---|---|
| Property price | $750,000 |
| Closing and financing costs | $22,500 |
| Initial repairs | $35,000 |
| Additional operating cash | $20,000 |
| Total uses | $827,500 |
| Purchase loan | ($500,000) |
| Buyer cash required | $327,500 |
After the annual reserve and debt payment, modeled cash flow is $11,176, rounded. Divide the unrounded $11,175.73 by $327,500 to get approximately 3.41% annual cash-on-cash return before tax. This is not total return: appreciation, loan principal reduction, income taxes and eventual selling costs are not included in that annual distribution measure.
The $20,000 operating cash is included in the initial uses and buyer contribution. Its deposit is not a recurring expense to subtract again every year. Spending it later must still be recorded in the monthly cash budget.
Try the complete five-unit underwriting calculator
Interactive underwriting worksheet
Five-unit multifamily underwriting calculator
Model a purchase, reconcile NOI and cash flow, size debt using your assumptions, and test a vacancy shock and sale at loan maturity.
Illustrative results for the starting assumptions. Change inputs and select Update underwriting.
- Annual cash flow after reserves and debt
- $11,176
- Net cash flow / annual debt service
- 1.25×
- Buyer cash including initial liquidity
- $327,500
- Annual cash-on-cash return, before tax
- 3.4%
| Potential annual scheduled rent | $108,000 |
|---|---|
| Effective gross income after rental loss | $100,560 |
| Management expense | $8,045 |
| Net operating income, before replacement reserve | $59,515 |
| Net cash flow after replacement reserve | $55,515 |
| Annual principal and interest | $44,339 |
| Total purchase uses, including initial cash | $827,500 |
| Loan limit from your DSCR assumption | $500,820 |
| Loan limit from your purchase LTV assumption | $562,500 |
| Lower modeled loan limit, before other lender limits | $500,820 |
| Downside annual cash flow after debt | -$4,047 |
| Downside coverage | 0.91× |
| Loan balance at stated maturity | $458,663 |
| Assumed sale value from exit NOI / cap rate | $866,667 |
| Sale cash after selling costs and loan payoff | $382,004 |
- All rates, ratios, leverage and sale assumptions are editable illustrations, not quoted program terms. The loan-limit calculation excludes other lender constraints and does not establish approval.
- NOI excludes debt service and the separately entered reserve. The coverage and cash-on-cash tests deduct that reserve once. The sale value uses the separate exit NOI input.
- Downside changes rental loss and fixed expenses; management remains a percentage of effective income and the reserve stays unchanged. No future rent growth is assumed.
- Sale cash excludes income taxes, prior operating distributions and recovery of initial equity. It is not profit or IRR. Refinance availability is not calculated.
The downloadable workbook starts with the same assumptions. Its rent-roll rows feed scheduled monthly rent. Select the base or downside case to recalculate one operating model. Replace the example with verified figures and retain a dated copy of your decision.
11. Stress a vacancy and expense increase together
One unit vacant for an entire year represents 20% rental loss only when each unit contributes equal rent and no other losses occur. The example uses that simplified 20% downside and increases fixed operating costs by 10%. Management remains 8% of EGI; the replacement reserve stays $4,000.
EGI falls to $87,600. Fixed costs rise to $36,300 and management becomes $7,008. NOI becomes $44,292; net cash flow after reserve is $40,292. The same debt payment produces a $4,047 annual cash shortfall and approximately 0.91 coverage.
Ask whether you can fund that deficit while also handling an unplanned repair. Test a higher insurance premium, slower turnover or lower accepted rent independently. The point is to learn which assumption changes your decision, then investigate that assumption rather than simply adding optimistic rent growth.
12. Underwrite the maturity exit before closing
With the example’s five-year maturity, the scheduled loan balance is approximately $458,663. That is the amount still owed, before any applicable payoff charges. Twenty-five-year amortization does not eliminate the five-year refinancing obligation.
For a hypothetical sale at maturity, $65,000 exit NOI divided by a 7.5% cap rate implies $866,667 gross value. After assumed 3% selling costs and the modeled loan balance, cash remaining is approximately $382,004. That is sale equity, not profit. Compare it with contributed cash, interim distributions, additional capital and taxes separately.
A weaker refinance can require new equity. If accepted value is $625,000 and a future lender advances an assumed 70%, gross proceeds are $437,500. Subtract $15,000 of refinance costs and compare $422,500 with the $458,663 balance: approximately $36,163 of additional cash is needed. Cash-flow sizing could reduce proceeds further. Neither the future value nor that leverage is promised.
13. Set your offer and diligence conditions
Start with the price at which supported income, required work, financing and your return requirements fit together. Keep the assumptions that make the deal work visible. If the seller wants a price supported only by unearned future rent, decide whether the execution risk belongs in a lower price, different structure or a declined purchase.
Have qualified advisers review the contract, title, tenancies, entity structure and local requirements. Coordinate inspection and financing deadlines with the actual availability of documents. A purchase agreement should not depend on a report or approval that cannot arrive within its conditions.
Write a short decision record: verified income, accepted expense budget, initial cash, downside funding need, remaining diligence and maturity plan. Identify what would cause you to stop. This turns the model into a repeatable investment process rather than an attractive spreadsheet saved after the offer.
Prepare the property for financing review
Use the printable five-unit diligence worksheet to organize unit verification, financial sources, inspections, repair bids, debt terms, funds and exit support. The first commercial multifamily financing guide covers borrower preparation, while the commercial property calculator provides another property-level screen.
Request commercial financing review with the address, legal unit count, price, rent roll, trailing income and expenses, repair budget, requested loan, available cash and ownership experience. Explain uncertainties early. The lender’s accepted figures and conditions govern the actual financing decision.
Planning a larger apartment acquisition? The 10–30 unit multifamily underwriting guide adds unit mix, separate payroll and management duties, capital-project budgeting, debt-yield sizing and a replacement-loan payoff analysis.