Multifamily Underwriting 101: NOI, Cap Rate, and DSCR

How Multifamily Loans Are Different

When you move from 1-4 unit residential into 5+ unit multifamily, the underwriting changes fundamentally. Lenders stop looking at you and start looking at the property as a business.

The three numbers that drive every multifamily underwriting decision: NOI, Cap Rate, and DSCR.

Net Operating Income (NOI)

NOI is the property's annual income after operating expenses but before debt service (mortgage payments).

NOI = Gross Rental Income - Vacancy - Operating Expenses

Gross Rental Income includes:

All unit rents (at market or actual, depending on the lender)

Laundry income, parking fees, storage fees

Any other recurring income from the property

Vacancy allowance is typically 5-10% of gross income, depending on the market and historical occupancy.

Operating expenses include:

Property taxes

Insurance

Property management (typically 5-10% of gross income)

Repairs and maintenance

Utilities (if landlord-paid)

Common area maintenance

Legal and accounting

Reserves for capital expenditures (CapEx)

What's NOT in operating expenses: Mortgage payments, depreciation, capital improvements. These are separate.

Cap Rate (Capitalization Rate)

Cap rate tells you what return the property generates relative to its value, independent of financing.

Cap Rate = NOI / Purchase Price (or Value)

A 12-unit building with $120,000 NOI purchased at $1,500,000 has a cap rate of 8.0%.

What cap rates mean:

4-5%: Class A, prime location, very stable. Common in NYC, LA, SF.

5-7%: Class B, solid neighborhoods, most institutional targets.

7-9%: Class C or value-add opportunities. Higher returns, more risk.

9%+: Distressed, tertiary markets, or heavy value-add.

Cap rates vary dramatically by market. An 8% cap in Dallas is normal; an 8% cap in Manhattan means something is very wrong.

DSCR for Multifamily

Multifamily DSCR works the same as residential — but the numbers are bigger and the threshold is stricter.

DSCR = NOI / Annual Debt Service

Most commercial and multifamily lenders require:

Agency (Fannie/Freddie): 1.20-1.25 DSCR minimum

CMBS: 1.25+ DSCR

Bank/credit union: 1.20-1.30 DSCR

Bridge: 1.0-1.10 DSCR (more flexible, higher rates)

Debt Yield

Debt yield is a metric that's gaining importance, especially with CMBS lenders.

Debt Yield = NOI / Loan Amount

It measures the lender's return if they had to foreclose. Most lenders want 8-10%+ debt yield.

Example:

NOI: $120,000

Loan: $1,125,000

Debt Yield = $120,000 / $1,125,000 = **10.7%**

This is a strong debt yield. The lender feels protected.

Putting It Together: Sponsor Brief

When you submit a multifamily deal, lenders evaluate:

MetricTargetOur Example

|--------|--------|-------------|

NOIStable or growing$120,000 Cap RateMarket appropriate8.0% DSCR1.20+1.52 Debt Yield8%+10.7% LTVUnder 75%75% Occupancy90%+95%

When all these metrics are green, you have lenders competing for your deal. When one or more is yellow, you need to know which programs are flexible on which metric.

Financing Paths

Agency (Fannie Mae / Freddie Mac):

Best rates, longest terms, non-recourse. Requires stabilized property (90%+ occupancy), 1.25+ DSCR, clean sponsorship. 5+ units only.

CMBS (Commercial Mortgage-Backed Securities):

Non-recourse, good rates, less flexible. Works for stabilized assets. Higher debt yield requirements.

Bank / Credit Union:

Recourse, flexible terms, relationship-driven. Great for local operators and value-add deals.

Bridge:

Short-term (12-36 months), higher rates, maximum flexibility. Ideal for value-add, lease-up, or repositioning. Transition to permanent financing when stabilized.

What We Do With Your Numbers

Our Sponsor Brief tool takes your NOI, purchase price, and loan request and generates a complete underwriting memo — DSCR, debt yield, cap rate, leverage analysis, and the best financing path for your deal.

You'll know in seconds whether your deal is a green light, yellow light, or needs restructuring.