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Knowing how to evaluate a multifamily investment property comes down to four numbers: net operating income, cap rate, cash-on-cash return, and the expense ratio behind all three. Run them in that order. Pull each one from a rent roll you’ve checked against bank deposits, not the seller’s summary sheet, and you’ll know within an hour whether a property earns a full due diligence period. Below is the full math, worked through once on a real deal, a $1.8 million, 12-unit building. The same formulas apply to a duplex or a 200-unit complex.
How Do You Calculate a Multifamily Property’s Net Operating Income (NOI)?
Net operating income is what a property earns from operations in a year, after operating expenses but before any debt payments, and you get it with one subtraction: NOI equals effective gross income minus operating expenses.
Effective gross income starts with gross potential rent (every unit rented at full market rate, all year), subtracts a realistic vacancy and credit loss allowance, then adds back other income like laundry, parking, pet rent, and storage fees. Operating expenses cover property taxes, insurance, management, repairs, utilities the owner pays, and a reserve for replacements. What doesn’t belong in that expense line is just as important: mortgage principal and interest, capital improvements, and income tax all sit below NOI, not inside it. A rent roll padded with inflated other-income or an expense list missing a management fee (because the seller self-manages) is the single most common way NOI gets overstated.
On the example property: $260,000 in gross potential rent, less a 5% vacancy and credit loss allowance ($13,000), plus $8,000 in other income, gives an effective gross income of $255,000. Subtract $140,000 in operating expenses and you land on a $115,000 NOI. Every metric that follows is built on that one figure, so an error here compounds through the cap rate, the cash-on-cash return, and the lender’s coverage ratio alike.
If the underlying formulas here are new to you, our guide to investing in rental property for beginners covers the fundamentals these build on before you tackle a multifamily deal specifically.
What’s a Good Cap Rate for a Multifamily Property?
A cap rate between 5% and 8% covers most multifamily deals, with the exact number set by location and risk rather than any universal target. The formula is simple: cap rate equals NOI divided by purchase price. On the $115,000 NOI above, a $1.8 million purchase price works out to a 6.4% cap rate.
Lower cap rates, typically 4% to 5%, show up on stabilized properties in high-demand metro markets, where buyers accept a smaller return for lower risk and steadier occupancy. Higher cap rates, commonly 7% to 9% or more, show up in secondary or tertiary markets, older buildings, or “value-add” deals where the upside comes from raising rents and cutting expenses after closing rather than from the day-one numbers. Neither is inherently the better buy. A cap rate only tells you the price you’re paying for a dollar of income, not whether that income is durable.
The formula holds regardless of unit count, though financing differs sharply by size. A four-unit building typically qualifies for a residential mortgage, while anything larger needs commercial financing with its own underwriting standards. If you’re evaluating a 2 to 4 unit property specifically, our small multifamily investing guide covers those financing distinctions in full, and our companion piece on investing in multifamily real estate makes the case for the 5-plus unit, commercial side of the same decision.
How Do You Calculate Cash-on-Cash Return and DSCR?
Cash-on-cash return measures what you actually earn on the cash you put in, not the property’s total value, which makes it the number that tells you whether this specific deal, financed on these specific terms, is worth doing. The formula: annual cash flow divided by total cash invested, where annual cash flow is NOI minus your annual mortgage payments.
On the example deal, a 25% down payment ($450,000) plus $25,000 in closing and reserve costs puts total cash invested at $475,000. Against $85,000 in annual debt service, cash flow comes to $30,000 ($115,000 NOI minus $85,000), for a 6.3% cash-on-cash return.
Lenders run a related but separate number before they’ll fund the loan at all: the debt service coverage ratio, or NOI divided by annual debt service. Most commercial lenders want to see a DSCR of at least 1.20 to 1.25, and this deal’s $115,000 NOI against $85,000 in debt service clears that comfortably at 1.35. A DSCR that dips near 1.0 means the property’s income barely covers the mortgage, with no cushion for a bad month or an unplanned repair.
A cash-on-cash return in the 6% to 8% range is typically the threshold investors use to decide whether a deal earns a spot in a growing portfolio, rather than judging cap rate in isolation. For how that comparison plays out once you’re weighing multiple properties against each other, see our guide to how to build a rental portfolio.
What Expense Ratio Should You Expect on a Multifamily Property?
Operating expenses typically run 40% to 60% of effective gross income, with the exact ratio driven by the building’s age, unit count, and whether residents or the owner pays for utilities. On the example property, $140,000 in expenses against $255,000 in effective gross income lands at a 55% expense ratio, roughly the middle of that range.
The main line items are property taxes, insurance, a management fee (commonly 8% to 12% of collected rent), repairs and maintenance, owner-paid utilities, and a capital reserve. Older buildings, properties with onsite payroll, and anything with owner-paid utilities tend to sit at the higher end. Newer, individually metered properties with lean staffing sit lower.
Treat an expense ratio well below 40% as a question, not a selling point. It usually means the seller left out a management fee they don’t currently pay themselves, skipped a replacement reserve entirely, or is reporting expenses from an unusually light year. Rebuild the number using market-rate expenses for every line item before you trust the NOI it produces.
What Should a Rent Roll Show Before You Make an Offer?
A rent roll worth trusting shows, unit by unit, the current rent, lease start and end dates, security deposit held, delinquency status, and vacancy history for the past 12 months. Match every figure on it against bank statements and signed leases, since the seller’s spreadsheet alone proves nothing.
Three patterns are worth flagging before you go further:
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Month-to-month clustering right before a sale, which can mean occupancy was propped up with short-term concessions rather than durable demand
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Rents well below market on long-tenured units, which is genuine upside but also a turnover risk once those residents eventually move
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Deposits listed on the roll with no matching trust or escrow ledger, since the deposit is money you’re liable for the moment you take ownership
Cross-checking the rent roll against 12 months of bank deposits, not the seller’s income statement, is the single fastest way to catch an inflated NOI before you’re under contract.
How Does the Full Underwriting Come Together on One Deal?
Every formula above stacks into a single walk-through on the same 12-unit, $1.8 million property:
| Line item | Amount |
|---|---|
| Gross potential rent | $260,000 |
| Vacancy and credit loss (5%) | -$13,000 |
| Other income | +$8,000 |
| Effective gross income | $255,000 |
| Operating expenses (55%) | -$140,000 |
| Net operating income | $115,000 |
| Purchase price | $1,800,000 |
| Cap rate | 6.4% |
| Down payment (25%) | $450,000 |
| Closing and reserve costs | $25,000 |
| Total cash invested | $475,000 |
| Annual debt service | $85,000 |
| Annual cash flow | $30,000 |
| Cash-on-cash return | 6.3% |
| DSCR | 1.35 |
Nothing here requires financial software. A calculator and a verified rent roll get you through every line, and a property that can’t produce clean numbers for this table isn’t ready for an offer yet, regardless of how good the location looks.
What Should Due Diligence Confirm Before You Close?
Due diligence, typically a 30 to 45 day window after your purchase agreement is signed, is when you verify every number above against source documents rather than the seller’s summary, before your earnest money stops being refundable.
Work through these in order:
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Match 12 to 24 months of bank deposits against the rent roll, unit by unit, to confirm reported income actually arrived
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Pull 2 to 3 years of tax returns and profit-and-loss statements and compare them to what the seller disclosed, checking for expense categories that quietly disappeared
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Walk every single unit, no exceptions. The one unit a seller’s rep claims you can’t access is often hiding the worst condition in the building
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Order third-party inspections of structural, mechanical, and environmental systems, with particular attention to anything a lender would flag as a life-safety issue
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Confirm zoning matches the actual unit count. An illegally converted unit can wipe out income you underwrote and may force costly compliance work
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Run a title and lien search to confirm you’re buying a clean property, not one carrying someone else’s unresolved debt
How you take title matters here too, separate from the underwriting itself. Most investors close in an LLC’s name rather than personally, for liability separation from their other assets. If you’re weighing that same decision on a property you currently live in, our breakdown of putting your house in an LLC and renting it to yourself covers the tradeoffs.
FAQ
What is a good cap rate for a multifamily property?
Most multifamily deals trade between 5% and 8%. Lower cap rates, around 4% to 5%, are typical in stable, high-demand metros. Higher ones, from 7% up to 9% or more, show up in emerging markets or properties with more risk built in. Compare the cap rate against resident stability and the property’s condition, not on its own.
What counts as a good cash-on-cash return for multifamily?
Most investors look for 6% to 10%, though the right number depends on your financing terms and how much risk you’re taking on. A lower cash-on-cash return paired with strong appreciation potential can still be worth it. Run both numbers before deciding.
How long does multifamily due diligence usually take?
Most purchase agreements set 30 to 45 days. That window covers financial verification, physical inspections, and a title search, and it’s the last point before your earnest money stops being refundable, so treat the deadline as firm.
Do these formulas change for a duplex versus a 100-unit complex?
No. NOI, cap rate, cash-on-cash return, and DSCR are calculated the same way at any scale. What changes is financing, since 2 to 4 unit properties typically qualify for residential mortgages while anything larger needs a commercial loan.
What’s the difference between NOI and cash flow?
NOI is income after operating expenses but before debt payments, so it reflects the property itself, independent of how you financed it. Cash flow is NOI minus your mortgage payment, the actual money left in your pocket each year. Two buyers can underwrite the same NOI and land on very different cash flow depending on their loan terms.
This article is general information, not legal advice. Markets and lending terms change, and every situation is different. For guidance on a specific deal, talk to a qualified financial or tax professional.
