Multifamily Underwriting 101: NOI, Cap Rate, and DSCR

The current apartment backdrop

CBRE reported 4.3% multifamily vacancy and 0.5% year-over-year growth in average monthly rent in Q2 2026. Those national figures provide context; they do not establish the occupancy or achievable rent of an individual building. Source: CBRE's Q2 apartment report, July 29.

Our interpretation for a financing submission is to make the current operating picture easy to verify. Reconcile the rent roll, collections, concessions and trailing expenses before asking a lender to accept a stabilized projection.

Net operating income starts with actual operations

Net operating income, or NOI, is property revenue less operating expenses, before debt service. Start with collected and supportable revenue, account for vacancy and credit loss, and include recurring property expenses such as taxes, insurance, management, maintenance and owner-paid utilities.

Capital improvements, depreciation and debt payments are not ordinary operating expenses. Lender adjustments and replacement-reserve treatment can differ, so identify the NOI definition used in each proposal. Show current, underwritten and projected NOI as separate figures when they differ.

Cap rate connects income and value

The capitalization rate is NOI divided by property value. In a hypothetical example, $200,000 of annual NOI at a 5% cap rate implies $4 million of value. At a 6% cap rate, the same NOI implies about $3.33 million. These are sensitivity assumptions, not market cap-rate quotes.

The example shows how valuation can change without a rent change. Use comparable transactions and property-specific analysis for the actual valuation; a blanket city or property-class range is not a substitute.

DSCR compares NOI with annual debt service

For a commercial apartment analysis, DSCR is the NOI accepted for underwriting divided by annual debt service. If underwritten NOI is $200,000 and annual debt service is $160,000, DSCR is 1.25x. The required ratio and calculation depend on the financing program.

This differs from a residential rental calculation that compares rent with a housing payment. Borrower and sponsor experience, liquidity and the condition of the asset remain relevant alongside the property ratios.

Debt yield provides another view

Debt yield divides annual NOI by the loan amount. At $200,000 of NOI and a $2.5 million loan, it is 8%. This hypothetical measure does not depend on the interest rate or amortization schedule, but the NOI definition still matters. It is one input, not a universal pass/fail threshold.

Show why the business plan can work

For a stabilized property, document collections, occupancy and recurring expenses. For a value-add property, add the renovation scope, unit downtime, leasing assumptions and funding needed before the higher income is achieved.

Present a downside case that changes rent, expenses, timing or valuation. Identify the resulting debt-service coverage and any additional equity needed. Keeping those assumptions visible helps reviewers understand the sponsor's plan.

Prepare the submission

Operating evidence: current rent roll, trailing financial statements and year-to-date results.

Property plan: location, unit mix, condition, capital budget and comparable properties.

Financing request: purchase price or current payoff, requested proceeds and closing timeline.

Sponsor information: ownership, experience, liquidity and management plan.

Exit assumptions: expected stabilization, sale or refinance, with a downside case.

Explore multifamily financing or submit a commercial scenario. For hotels, senior housing and operating assets, see the September commercial market review.

Updated September 15, 2026. Market observations retain their stated reporting period; numerical underwriting examples are hypothetical.