Multifamily real estate is the most popular commercial property type for a reason: predictable income, multiple revenue streams, and financing options that don't exist for other asset classes. But a bad multifamily deal will drain your capital just as fast as a good one builds it.
The difference is underwriting. Not gut feel. Not broker projections. Your own numbers, run through five metrics that separate deals worth pursuing from ones that look good on a flyer.
Here's the framework professional investors use — and how to run it yourself in under 10 minutes.
Step 1: Calculate Net Operating Income (NOI)
NOI is the foundation. Every other metric in this analysis depends on it, so if you get NOI wrong, everything downstream is wrong too.
The formula:
For a multifamily property, start with the gross potential rent — what the property would earn if every unit was leased at market rate, 12 months a year. Then subtract:
- Vacancy & credit loss — typically 5-10% for stabilized multifamily. Use the actual vacancy rate if you have trailing financials, not the broker's "pro forma" assumption.
- Operating expenses — property taxes, insurance, maintenance, management fees (usually 6-10% of gross income), utilities the owner pays, landscaping, and reserves for capital expenditures.
Example: A 20-unit building with average rent of $1,200/month generates $288,000 in gross annual income. At 7% vacancy ($20,160) and $115,000 in operating expenses, your NOI is $152,840.
Common mistake: trusting the seller's expense numbers. Property taxes will reassess at your purchase price. Insurance has increased 20-40% in many markets since 2023. Management fees scale with income. Always build your own expense assumptions.
Calculate NOI instantly with LandForge's free NOI calculator.
Step 2: Evaluate the Cap Rate
Cap rate tells you what yield the property generates without financing. It's the universal comparison metric — you can use it to compare a 4-unit building against a 200-unit complex because it normalizes for price.
Using our example: $152,840 NOI on a $2,100,000 purchase price = 7.28% cap rate.
What does that mean? For multifamily specifically:
| Class | Typical Cap Rate | What It Signals |
|---|---|---|
| Class A (new, gateway city) | 3.5% – 5.0% | Premium location, stable tenants, minimal upside |
| Class B (1980s-2000s, secondary market) | 5.0% – 7.0% | Solid cash flow, moderate value-add potential |
| Class C (older, tertiary market) | 7.0% – 10.0%+ | Higher yields, more management-intensive |
A 7.28% cap rate on a Class B/C property in a secondary market is competitive — it suggests the property is priced fairly relative to its income. But cap rate alone doesn't tell you whether the deal works for you. That depends on how you finance it.
Run your cap rate calculation with our free cap rate calculator.
Step 3: Check Debt Service Coverage (DSCR)
DSCR answers the most important question for any leveraged deal: can the property pay its mortgage?
Annual debt service is your total mortgage payments for the year (principal + interest). A DSCR of 1.00x means the property's income exactly covers the mortgage — no cushion. Lenders won't touch that.
Minimum thresholds:
- Agency loans (Fannie/Freddie): 1.25x minimum
- CMBS loans: 1.25x – 1.30x
- Bank/credit union: 1.20x – 1.25x
- Bridge/value-add: 1.10x – 1.15x (going-in)
Example: $152,840 NOI with $112,000 annual debt service = 1.36x DSCR. That's comfortable — 36% cushion above your mortgage obligation. You could absorb a rent decline, a spike in vacancy, or unexpected repairs without missing payments.
If DSCR comes in below 1.20x, either renegotiate the price, increase your down payment, or walk. A thin DSCR means one bad quarter could put you in default.
Check your DSCR with LandForge's free DSCR calculator.
Step 4: Measure Cash-on-Cash Return
Cap rate ignores financing. Cash-on-cash return tells you what your actual invested dollars earn each year.
Your annual pre-tax cash flow is NOI minus debt service. Your total cash invested includes down payment, closing costs, and any immediate capital expenditures.
Example: $152,840 NOI minus $112,000 debt service = $40,840 annual cash flow. On a $630,000 total cash investment (30% down + closing costs), that's a 6.48% cash-on-cash return.
Is that good? Context matters:
- Below 4%: You're barely beating a savings account. The risk isn't compensated.
- 4-7%: Acceptable for stable, well-located multifamily. You're earning above bond yields with appreciation upside.
- 7-10%: Strong return. Common in value-add deals or secondary/tertiary markets.
- 10%+: Exceptional or high-risk. Verify the numbers twice.
The power of cash-on-cash analysis is comparing different financing structures on the same property. A deal with 70% LTV at 6.5% might show 6% cash-on-cash, while the same deal at 75% LTV and 7.0% might show 4.5%. The financing terms change your return more than most people expect.
Calculate your cash-on-cash return with our free calculator.
Step 5: Project Internal Rate of Return (IRR)
IRR is the comprehensive metric. While cash-on-cash looks at a single year, IRR models your total return across the entire hold period — annual cash flow, mortgage paydown, property appreciation, and net sale proceeds.
IRR accounts for the time value of money: a dollar today is worth more than a dollar five years from now. It's the single number that captures the full investment picture.
How to estimate multifamily IRR:
- Project annual NOI growth (2-3%/year for stabilized, higher for value-add)
- Calculate annual cash flow after debt service for each year of the hold
- Estimate the exit price using a terminal cap rate (usually 25-50 bps higher than going-in)
- Subtract selling costs (2-3%) and remaining loan balance
- Calculate the discount rate that makes the NPV of all cash flows equal zero
Target IRR benchmarks for multifamily:
| Strategy | Target IRR | Hold Period |
|---|---|---|
| Core (stabilized, Class A) | 8% – 12% | 7-10 years |
| Core-plus (light value-add) | 12% – 15% | 5-7 years |
| Value-add (renovation, reposition) | 15% – 20%+ | 3-5 years |
| Opportunistic (ground-up, distressed) | 20%+ | 2-4 years |
IRR is the hardest metric to calculate by hand. It requires iterative computation and multiple assumptions about future performance. That's where automated tools save hours of spreadsheet work.
See a complete multifamily analysis with all five metrics calculated — including IRR projection — on our sample deal page.
Putting It All Together
Here's the decision framework. Run all five metrics and check:
- NOI — Is it based on your expense assumptions, not the broker's pro forma?
- Cap rate — Is it competitive for this property class and submarket?
- DSCR — Is it above 1.20x with room for downside scenarios?
- Cash-on-cash — Does the levered return justify the risk vs. passive alternatives?
- IRR — Does the total return over the hold period meet your investment criteria?
If all five check out, you have a deal worth pursuing. If one or two are marginal, understand why and whether the risk is acceptable. If three or more are below threshold, pass — regardless of how good the property "feels."
The entire analysis takes 5-10 minutes with the right tools. Without them, you're staring at spreadsheets for hours and still wondering if you missed something.