1. Verify income
Compare the rent roll with leases and bank deposits. Note loss-to-lease (current rents vs market), concessions, delinquency and other income. Underwrite vacancy and credit loss realistically — in a 10-unit building, one vacancy is 10%.
2. Rebuild expenses
Don't rely on the seller's expense figures alone. Re-assess property taxes at your purchase price, get an insurance quote, add professional management even if you'll self-manage, and include repairs, turnover and replacement reserves (often $250–$400 per unit per year for reserves alone).
3. Calculate NOI and value
Effective gross income minus operating expenses gives NOI. Compare the implied cap rate at the asking price with recent sales in the submarket.
4. Layer in debt and returns
Model the loan: rate, amortization, and debt service coverage ratio (lenders commonly want 1.20–1.25x or better). Calculate cash-on-cash return and run downside cases: higher vacancy, higher taxes, a major repair in year one.
This guide is general information, not legal, tax or financial advice. Talk to your own advisors about your situation.
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