Single-family investors moving into multifamily for the first time often try to underwrite a 12-unit building the same way they'd underwrite a rental house. It doesn't work — multifamily, especially 5+ units, is valued and financed on income, not on comps to nearby sales. Three numbers do almost all the work: NOI, cap rate, and DSCR.
Net Operating Income (NOI) Is the Foundation
NOI is total income from the property minus operating expenses — but before debt service. It does not include your mortgage payment. Get this number right and everything else follows; get it wrong (usually by underestimating expenses like maintenance reserves, vacancy loss, or property management) and every number built on top of it is wrong too.
Cap Rate Converts Income Into Value
Capitalization rate is NOI divided by purchase price (or, in reverse, NOI divided by market cap rate tells you what a property should be worth). Cap rates vary by market and asset class — a lower cap rate generally signals a market where investors accept less yield for more perceived stability, and a higher cap rate signals more perceived risk or a less competitive market. Comparing a property's cap rate to recent comparable sales in the same submarket is how you judge whether an asking price is fair.
DSCR Is What Your Lender Actually Cares About
Debt Service Coverage Ratio is NOI divided by annual debt service (your total mortgage payments for the year). A DSCR of 1.25 means the property generates 25% more income than it needs to cover its debt. Most commercial lenders won't finance a multifamily deal below roughly 1.20-1.25 DSCR — know this number before you go to a lender, not after they tell you no.
Value-Add Math Is Where the Real Upside Lives
Because multifamily value is a direct function of NOI, raising NOI — through rent increases, expense reduction, or adding income streams like laundry or storage — directly raises the property's value at the same cap rate. This is the core logic behind "forced appreciation," and it's why experienced multifamily investors often care more about a property's upside potential than its current condition.
Underwrite Before You Tour
A full multifamily underwrite means real NOI, purchase and exit cap rate assumptions, and DSCR — not a simplified back-of-napkin estimate. FORGE's Deal Analyzer runs a real income-capitalization engine for 5+ unit properties specifically because this math deserves more than a rough guess, and can pull property details straight from an uploaded document to build a lender-ready export.