How to analyze a small multifamily deal, unit by unit

Worked example: a fourplex

1. Price $520,000 for 4 units is $130,000 per door. Rent is $1,250 per unit, $60,000 a year.
2. Operating costs: vacancy 6%, repairs 10%, management 8% of rent, plus $7,800 taxes and $3,200 insurance. Total $25,400, an expense ratio of 42.3% of gross rent.
3. Net operating income $34,600, cap rate 6.65%. With 25% down at 7%, debt service is $31,136 a year and DSCR is 1.11.
4. Cash flow is $289 a month on $145,600 of cash, a cash-on-cash return of 2.4%.
5. Break-even rent is $1,155 per unit. If every rent falls 10%, cash flow becomes -$91 a month.

Rent roll checklist

• A unit-by-unit rent roll plus the leases behind it; compare each lease rent with current comparables.
• Which units are below market and when leases end, so you know when rent can change and when turnover costs hit.
• Who pays which utilities. Owner-paid water, trash or heat is an expense the generic percentages do not capture; add it to the taxes and insurance line.
• Twelve months of actual income and expenses, compared with the seller's summary.
• Roof, boiler or furnace, plumbing and electrical age, since one capital item can erase a year of cash flow.

Pitfalls specific to small multifamily

• Underwriting with the seller's pro forma rents instead of rents in place.
• Using the single-family 50% rule on a property with shared systems and owner-paid utilities without checking actuals.
• Forgetting the cost of vacating an owner-occupied unit if the seller lives there.
• Comparing price per door across buildings of different condition and unit size.

Frequently asked questions

Is 2 to 4 units residential or commercial?

Lenders usually treat one to four units as residential for financing, while five or more are typically underwritten commercially. Confirm with your lender.

What expense ratio should I expect?

It depends on who pays utilities, the building's age and taxes. Compute it from the property's actual expense history rather than assuming a number.

Why look at break-even rent per unit?

It tells you how far rents can fall before the building stops paying for itself, which is a direct margin-of-safety check.