How to Underwrite a 20-Unit Apartment Building
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To underwrite a 20-unit apartment building, start with gross potential rent from the rent roll, subtract vacancy and rent losses, add other income, subtract operating expenses to reach net operating income (NOI), and then test that NOI against the price, the loan payment and a weaker year. A small building uses the same method as a large one, but one empty unit is 5% of the rent roll, so small-deal underwriting is more sensitive to a single bad month. If you plan to raise equity for the building, DoorRaise helps you present the deal to your investors.
This post is a worked example of the method in our underwriting basics. Every number below is hypothetical, for illustration only, and not a benchmark or a forecast.
What are the steps to underwrite a 20-unit building?
- Build gross potential rent (GPR) from the rent roll.
- Subtract vacancy, loss to lease, concessions and bad debt.
- Add other income you can document.
- Subtract operating expenses, using your own numbers for taxes, insurance and management.
- Compute NOI, then the cap rate at the asking price.
- Add the loan and compute the debt service coverage ratio (DSCR).
- Run a downside case and look at cash flow and DSCR again.
A hypothetical worked example
Assume 20 units with an average market rent of $1,100 a month, a price of $2,100,000, and a 70% loan at 6.5% over 30 years. These are made-up round numbers.
| Line | Annual amount |
|---|---|
| Gross potential rent (20 x $1,100 x 12) | $264,000 |
| Vacancy at 7% | -$18,480 |
| Loss to lease at 3% | -$7,920 |
| Concessions and bad debt at 2% | -$5,280 |
| Other income (laundry, fees, pets) | +$12,000 |
| Effective gross income | $244,320 |
| Property taxes | -$30,000 |
| Insurance | -$14,000 |
| Repairs and turnover | -$16,000 |
| Utilities | -$18,000 |
| Management and payroll | -$24,000 |
| Administrative and marketing | -$5,000 |
| Total operating expenses | -$107,000 |
| Net operating income | $137,320 |
The expense ratio is $107,000 divided by $244,320, about 43.8%. The cap rate at a $2,100,000 price is $137,320 divided by $2,100,000, about 6.54%.
The loan is $1,470,000. At 6.5% over 30 years the payment is about $9,291 a month, or $111,497 a year. DSCR is NOI divided by debt service: $137,320 divided by $111,497, about 1.23.
After $5,000 of annual reserves ($250 a unit), cash flow after debt is about $20,823. Equity needed is the $630,000 down payment plus assumed $42,000 closing costs and $20,000 of starting reserves, or $692,000. Cash-on-cash is about 3.0%.
What does the downside case show?
Raise vacancy by 5 points of GPR, which is $13,200. NOI falls to $124,120, DSCR to about 1.11, and cash flow after debt and reserves to about $7,600. The deal still pays its loan in this example, but the margin is thin. A weaker year, or a 1% rise in the interest rate on a floating loan, could erase it. That is the point of the test: it shows how much room the plan has.
Which numbers deserve your own research?
- Rents. Compare with rent comps, not just the seller's market rent.
- Property taxes. A sale can trigger a reassessment, see property tax reassessment.
- Insurance. Get a quote before you offer.
- Repairs and turnover. Use the T-12 and a property inspection, see the rent roll and T-12 guide.
- Management. Price a third-party manager even if you plan to self-manage.
How do you set the price from NOI?
Divide NOI by the cap rate you require. At 6.5%, $137,320 supports about $2.11 million. If the seller wants more, either the income needs to be higher or your required return is not met. Our cap rate guide explains how cap rates are chosen and why the exit assumption matters.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). It prepares the offering documents from the sponsor's inputs, coordinates escrow with Enterprise Bank & Trust, collects investor funds by wire only and handles filings. The deal page shows investors the business plan and the projections you enter. DoorRaise does not verify a seller's or a sponsor's numbers; sponsors must check what they present.
DoorRaise is for apartment buildings with 5 or more units, and sponsors can launch their deal here. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
To get started, create your sponsor page or see the fees.
FAQ
How do you underwrite an apartment building?
Build income from the rent roll, subtract vacancy and losses, subtract operating expenses to reach NOI, then test the price, the loan payment and a downside case.
What is NOI for an apartment building?
Net operating income is effective gross income minus operating expenses. It leaves out loan payments, depreciation, income tax and major capital spending.
What DSCR do lenders look for on a small apartment loan?
It varies by lender and program, so read the term sheet. Agency programs publish minimums, see multifamily DSCR loans.
Is a 20-unit building too small to syndicate?
Not by rule, but fixed costs per investor are higher on a small raise. See how many units for a first deal.
Should I use the seller's expense numbers?
Use them as a starting point and replace what you can: taxes, insurance and management first.
Sources
- Fannie Mae, Multifamily fixed-rate mortgage loans
- 17 CFR 240.10b-5, Employment of manipulative and deceptive devices
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.