Small Multifamily Underwriting: The Five Numbers

A small apartment building lives or dies on five numbers. NOI. Cap rate. Going-in DSCR. Stabilised DSCR. LTC.

Get them right and the loan sizes itself. Get one wrong and you find out at the refinance, with a check to write.

Below: what each number means, what lenders test it against, and a worked 8-unit example with every step shown. Every figure in the example is illustrative. It shows the math. It is not a quote.

The market you are underwriting into

Start with the benchmarks. According to Northmarq's 2026 midyear national multifamily report, published September 2026, multifamily cap rates averaged 5.75% in the first half of 2026. The same Northmarq report, published September 2026, put the first-half median price at $185,200 per unit. Northmarq's report also says national vacancy fell 20 basis points in the first half of 2026, to 5.7%.

Rates are the other half of the picture. According to Yahoo Finance's coverage of CBRE's H1 2026 Cap Rate Survey, published August 2026, cap rates stayed broadly flat in the first half even as the 10-year Treasury yield peaked at 4.67%.

Flat cap rates plus higher debt costs means thinner spreads. Small deals feel that first. So the five numbers have to hold up on their own.

Number 1: NOI

Net operating income is the engine. Every other number divides by it or into it.

The build is simple:

• Gross potential rent (GPR): every unit at market or in-place rent, 12 months.
• Minus vacancy and credit loss.
• Plus other income (laundry, parking, storage).
• Equals effective gross income (EGI).
• Minus operating expenses: taxes, insurance, repairs, management, utilities, payroll.
• Equals NOI.

NOI excludes debt service, depreciation and capital expenditure. Start from the trailing 12-month operating statement (T12) and the rent roll, not the offering memorandum.

Two checks catch most bad pro formas. According to Proprise's 2026 multifamily underwriting guide, published February 2026, stabilised properties typically carry 5 to 10% vacancy, and anything under 5% is aggressive. That same Proprise guide, published February 2026, puts operating expenses at 35% to 50% of EGI for most market-rate properties, with older buildings running higher.

If a seller's package shows a 30% expense ratio on a 1970s building, someone left out insurance or management.

Number 2: Cap rate

Cap rate is NOI divided by price. It does two jobs.

• Going-in cap rate: today's NOI over your purchase price. It tells you what you are paying for the income in place.
• Exit cap rate: the rate you assume when you value the stabilised building. It sets your after-repair value.

Underwrite the exit cap at or above today's market. If you assume compression, you are betting on the market, not on your plan. More on the formula in our guide on how to calculate cap rate.

Numbers 3 and 4: going-in and stabilised DSCR

Debt service coverage ratio is NOI divided by annual debt service. Above 1.00x, the building pays its own loan. Below 1.00x, you do.

You need two versions:

• Going-in DSCR: current NOI over the debt service on the acquisition loan.
• Stabilised DSCR: post-renovation NOI divided by the annual payment on the loan that takes you out.

On a value-add deal, going-in DSCR is often under 1.00x on a bridge loan. That is normal. Stabilised DSCR is the one that decides whether the refinance works.

What do takeout lenders want? According to Essex Capital Markets, in a piece published September 2026, most commercial lenders are underwriting to minimum DSCRs of 1.20x to 1.35x in 2026, with agency multifamily around 1.20x to 1.25x. According to Multifamily.loans, in a page updated August 2026, Freddie Mac retired its Small Balance Loan program on April 15, 2026 and now offers Conventional Small loans of $2 million to $10 million, up to 80% LTV, with a 1.25x minimum.

One naming trap. Essex Capital Markets, in that September 2026 piece, points out that a "DSCR loan" is a residential product for 1–4 unit rentals, separate from the commercial coverage ratio. Know which one your takeout is. The math in how to calculate DSCR applies to both.

Number 5: LTC

Loan-to-cost is the loan amount divided by total project cost: purchase price plus renovation budget, and on many deals closing costs and carry.

On value-add deals, lenders typically run a second test: loan-to-value against the after-repair value. The lower of the two governs. A big appraisal does not lift a loan that cost already caps. Our breakdown of LTV vs LTC walks through both.

The worked example: an 8-unit building

Illustrative. An 8-unit building, older units, rents below market.

• Purchase price: $900,000
• Renovation budget: $140,000
• Total cost: $1,040,000
• Vacancy held at 7% in both cases, above the 5% floor most guides call aggressive.

Expenses rise $7,000 at stabilisation. Higher rents usually bring a higher tax assessment and higher insurance. Do not let the expense line stay flat while rents climb.

Cap rate. Going-in: $55,440 / $900,000 = 6.16%. Yield on cost at stabilisation: $77,456 / $1,040,000 = 7.45%.

Value. Exit cap of 6.0%, set above Northmarq's 5.75% first-half average as a cushion. $77,456 / 0.06 = $1,290,933, about $1.29M.

The spread between a 7.45% yield on cost and a 6.0% exit cap is the profit. If those two numbers sit close together, the deal is thin.

Sizing the loans

The bridge loan. Illustrative terms: 75% of cost, interest-only at 10%.

• LTC: 75% × $1,040,000 = $780,000
• ARV check: $780,000 / $1,290,933 = 60.4%. Cost governs here, not value.
• Annual interest: $78,000
• Going-in DSCR: $55,440 / $78,000 = 0.71x
• Stabilised DSCR on the bridge: $77,456 / $78,000 = 0.99x

The building does not carry the bridge on day one. You fund that gap in cash or through an interest reserve, and you plan for it before closing.

The takeout loan. Illustrative terms: 6.5%, 30-year amortization, payoff of the $780,000 bridge.

• Annual debt service: $59,162
• Stabilised DSCR: $77,456 / $59,162 = 1.31x
• Maximum loan at a 1.25x minimum: about $817,000

The refinance clears with roughly $37,000 of room. That room is your margin for error.

The stress test: miss rent by $100

Now assume renovated units lease at $1,350, not $1,450.

• Stabilised NOI falls to $68,528
• DSCR on the same $59,162 of debt service: 1.16x
• Maximum loan at 1.25x: about $723,000

The takeout now falls about $57,000 short of the $780,000 bridge payoff. That is a $100 miss per unit, per month. It becomes a $57,000 check at the refinance.

Run this test on every deal. Find the rent at which stabilised DSCR hits exactly 1.25x. If that rent is above what the comps support, the deal does not work at that leverage. Lower the LTC or lower the price.

Run the five in order

1. NOI from the T12 and the rent roll. Vacancy at 5% or more. Expenses at a real ratio.
2. Going-in cap rate against the market average.
3. Going-in DSCR on the acquisition loan. Fund any gap before you close.
4. Stabilised DSCR on the takeout loan at a 1.25x minimum, then stress the rent.
5. LTC and ARV-LTV. The lower one sizes the loan.

For the full value-add playbook, see our guide to multifamily bridge loans for value-add.

What we check on our side

We lend to real estate investors in 45 states. Excluded: VT, UT, OR, SD and ND. Most programs need a 660+ credit score. Best pricing starts at 680+. Scores of 640–659 are reviewed case by case. We close in 5-10 business days, depending on the deal.

Pricing comes from our pricing engine, not from an example. Run your own numbers in the calculator. Terms are subject to underwriting, appraisal, title, and insurance.

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