The best deals don't wait. A 12-unit building with motivated sellers in a market you know gets listed on a Tuesday, generates ten calls by Wednesday, and goes under contract by Friday. The landlord who takes two weeks to build a spreadsheet model and "get comfortable with the numbers" doesn't get that deal.
Speed matters. But speed without discipline is how you overpay.
The good news: underwriting a rental property well doesn't require a financial model that would make a private equity associate proud. It requires six numbers, applied in a consistent sequence, that tell you whether a deal is worth pursuing and approximately what you should pay for it.
This is that framework.
The Mindset First
Underwriting isn't about proving a deal is good. It's about stress-testing whether it could be bad.
Most landlords approach a deal with a number in their head—a price they heard, a cap rate they want, a sense of what properties "go for" in this market—and then work backward through the numbers to see if they hold up. This is motivated reasoning. It finds deals to be good when they're not.
Good underwriting works forward, not backward. You start with what you know (the property), apply realistic assumptions (not optimistic ones), and let the math tell you the price—not the other way around.
The Six Numbers
Number 1: Gross Scheduled Rent (GSR)
What does this property earn if every unit is occupied at market rent?
This is your ceiling, not your operating assumption. To get here:
- Pull current rent roll from the seller (ask for it immediately—if they won't provide it, that's a flag)
- Compare in-place rents to current market comps in the submarket
- Note the gap: are in-place rents at market, below, or above?
Why it matters: Below-market rents are an opportunity—you can grow income over time through renewals. Above-market rents are a risk—you may be buying at an inflated income level that normalizes down when tenants turn over.
For initial underwriting, use the lower of: current in-place rents or a conservatively adjusted market rent. Don't underwrite to a rent growth story you haven't verified.
Number 2: Effective Gross Income (EGI)
GSR minus vacancy and credit loss.
Vacancy: Use the higher of: the property's actual trailing 12-month vacancy rate, or the market's average vacancy rate for the unit type. Don't use the seller's vacancy number uncritically—sellers often show vacancy in favorable periods. Use 5% as a floor even in strong markets; 8–10% if the market is softer or the property has a track record of turnover.
Credit loss: An additional 1–2% for uncollected rent (tenants who stop paying before eviction, partial payments, etc.). Many landlords ignore this. Don't.
EGI = GSR × (1 − vacancy rate − credit loss rate)
For a 10-unit building at $1,000/unit/month GSR with 7% combined vacancy/credit loss:
EGI = $120,000 × 0.93 = $111,600
Number 3: Operating Expenses
This is where most underwriting goes wrong. Sellers present "pro forma" expenses that are suspiciously lean. Your job is to reconstruct realistic expenses from the ground up.
Use the 50% rule as a quick sanity check: if you don't have actual expense data, assume operating expenses (excluding debt service) will run approximately 50% of EGI. It's not precise, but it catches deals where the seller is presenting 30% expense ratios that no real portfolio achieves.
For a 30-minute underwrite, estimate each category:
| Category | Rule of Thumb | |---|---| | Property taxes | Get actual figure from county assessor or seller's schedule | | Insurance | Call your broker with the address; get a 10-minute ballpark | | Management (or your time) | 8–10% of collected rents | | Maintenance & repairs | $800–$1,500 per unit per year for standard older stock | | Capital reserves | $800–$1,200 per unit per year (not on the P&L, but real) | | Utilities (if owner-pays) | Get actual bills from seller | | Admin / misc | 1–2% of EGI |
Total target: 42–52% of EGI for most small multifamily in secondary markets.
If the seller's presented expenses are below 38% of EGI, find out why before you proceed.
Number 4: Net Operating Income (NOI)
NOI = EGI − Operating Expenses
This is the property's earning power before your financing. It's also the primary input to valuation.
Continuing the example: EGI of $111,600 × 52% expense ratio = $58,032 in expenses. NOI = $53,568.
Number 5: Cap Rate and Implied Value
Cap rate = NOI / Purchase Price
Or rearranged: Purchase Price = NOI / Cap Rate
To know what you should pay, you need to know what cap rate is appropriate for this market and asset type. This is the one number that requires genuine market knowledge—you can't derive it from the property itself.
Ways to calibrate:
- Recent comparable sales: What did similar buildings in this submarket trade at in the last 12 months? Your local broker, LoopNet, and CoStar are sources here.
- Lender guidance: A local commercial lender will tell you where they're underwriting deals in this market. That's a reliable cap rate signal.
- Rule of thumb: Class B/C multifamily in secondary markets generally trades between 5.5–8.0% cap rates depending on market, vintage, and condition.
Using our example NOI of $53,568 at a 7.0% market cap rate: implied value = $53,568 / 0.07 = $765,257.
If the seller is asking $950,000, that's a 5.6% going-in cap rate on your underwritten NOI—either the market supports that, or there's a gap.
Number 6: DSCR and Cash Flow
This is where your financing intersects with the deal.
DSCR = NOI / Annual Debt Service
Most commercial lenders want a minimum DSCR of 1.20x. A DSCR of 1.0x means the property breaks even after debt service. Below 1.0x means it requires cash infusion to cover the mortgage.
Using our example: $765,257 purchase price, 25% down ($191,314), $573,943 mortgage at 7.5% over 25 years = approximately $50,280/year in debt service.
DSCR = $53,568 / $50,280 = 1.065x
That's tight. At a market cap rate deal with current financing rates, many deals are running thin DSCRs right now. This tells you either: you need more equity (higher down payment), you need to negotiate the price down, or you need a rent growth story that's credible enough to underwrite.
The 30-Minute Process
Here's the actual flow:
Minutes 0–5: Get the basics. Unit count, rent roll, asking price, year built.
Minutes 5–10: Verify market rents. Two minutes on Zillow or Rentometer for the submarket and unit type. Do in-place rents hold up?
Minutes 10–18: Build EGI and operating expenses. Use actuals where you have them (taxes, insurance). Use rules of thumb for the rest. Don't agonize—you're stress-testing, not filing.
Minutes 18–22: Calculate NOI. Does it feel right? Does the expense ratio pass the 50% sanity check?
Minutes 22–26: Apply market cap rate. Derive implied value. Compare to ask price. What's the gap?
Minutes 26–30: Run DSCR at your expected financing terms. Does it work at 1.20x or better? If not, what price does it require?
At the end, you have one of three answers:
- The deal works at asking price — worth pursuing
- The deal works at a lower price — make a lower offer or pass
- The deal doesn't work at any reasonable price — pass quickly
The goal isn't to find a way to make the deal work. The goal is to arrive at a clear position so you can act or move on without burning another week.
Common Shortcuts That Get Landlords in Trouble
Using the seller's pro forma as your expense baseline. Pro formas are marketing documents. They show what the property could earn with perfect occupancy, market rents, and minimal expenses. Use the trailing actuals and add your own expense judgment.
Ignoring reserves in the NOI calculation. Capital reserves (roof, HVAC, parking lot, major systems) aren't on the P&L—but they're real costs. If you're buying a 1980s building and not reserving $1,000/unit/year for eventual capital needs, you're understating your true cost of ownership.
Using optimistic vacancy. A seller who claims 2% vacancy on a 12-unit building in a 6% vacancy market isn't showing you the truth. Your underwrite should reflect the market, not the seller's narrative.
Forgetting your time. Self-managing a 12-unit building takes real time. If your underwriting assumes professional management at 9% but you're planning to self-manage, great—that's $8,000+ in additional annual cash flow. But if you're planning to self-manage and don't count your time at all, you're fooling yourself.
The Freehold Lens
Freehold's Acquisition Intelligence module runs this framework automatically for any deal you're evaluating. Input the address and rent roll; the platform pulls market rent comps, estimates local tax and insurance benchmarks, and runs the NOI and DSCR calculation in seconds—with flags for assumptions that look optimistic relative to comparable deals.
The 30-minute underwrite becomes a 5-minute one. And the output is consistent across every deal you evaluate, which is what makes comparison and prioritization possible.
Bottom Line
You don't need a complex spreadsheet to underwrite a rental deal well. You need six numbers: GSR, EGI, OpEx, NOI, implied value at market cap rate, and DSCR. Applied consistently and honestly—with realistic assumptions rather than optimistic ones—they tell you what you need to know.
The landlord who can run this in 30 minutes on a deal they've just heard about is playing a different game than the one who needs two weeks to "get organized." Speed and discipline together are a competitive advantage. Most independent operators have neither, which means the ones who develop both find themselves with significantly better deal flow and fewer bad acquisitions.
That's the edge this framework is designed to give you.