Key takeaways
- Two to four units appraise on residential comparables; five or more appraise on income.
- Because value equals NOI divided by cap rate, every $1 of recurring NOI creates $15 to $25 of value.
- Operating expense ratios typically run 35% to 50% of effective gross income.
- Value-add works when rent premiums genuinely exceed the annualized cost of the improvement.
The five-unit line
Properties with two to four units are financed and appraised like houses, using comparable sales. At five units and above the property becomes commercial: it is valued on income, financed with commercial debt, and underwritten on the asset's performance rather than primarily on your personal income.
That shift is why experienced investors describe five units as the real beginning of multifamily. It also means smaller balance sheets can access larger assets, because the loan depends on the property's DSCR. See our DSCR calculator.
Income valuation and forced appreciation
Value equals net operating income divided by market cap rate. At a 6% cap, each additional dollar of annual NOI creates roughly $16.67 of value. Raising rents $50 across 24 units adds $14,400 of gross annual income; after expenses, perhaps $10,000 of NOI, which is about $167,000 of value.
This is forced appreciation, and it is the structural advantage of commercial-scale multifamily over single-family rentals. It also runs in reverse: expense increases destroy value at the same multiple, which is why insurance and tax reassessment shocks have been so damaging to recent vintages of deals.
Expense benchmarks and underwriting discipline
Operating expense ratios generally run 35% to 50% of effective gross income depending on age, market, and whether utilities are owner-paid. Anything materially below that range in a seller's pro forma deserves scrutiny — deferred maintenance and understated management are the usual explanations.
Underwrite from trailing twelve-month actuals, then verify with a lease audit and a physical unit walk. Reassess property taxes at your purchase price, not the seller's assessed basis; in reassessment states this single line item routinely breaks deals that penciled on the seller's numbers.
Value-add in practice
The standard playbook: renovate unit interiors on turnover, add or improve amenities, implement utility billbacks, capture ancillary income, and tighten expense management. Each must clear a return hurdle — a $9,000 interior renovation producing $150 of monthly premium returns 20% annually and is excellent; the same renovation producing $50 is not.
The constraint is market rent. You cannot renovate past what the submarket supports. Verify achievable post-renovation rents against actual leased comparables in genuinely similar buildings before underwriting a premium.
Frequently asked questions
How much cash do I need for a small multifamily deal?
Commercial multifamily typically requires 25% to 35% down plus closing costs and reserves. On a $2 million asset that is roughly $600,000 to $750,000 all in, which is why syndication exists.
What is a good DSCR for multifamily?
Lenders commonly require 1.20× to 1.30×. Underwrite your own deals to a higher floor so that a rate or vacancy shock does not breach a covenant.
Should I self-manage a small multifamily property?
Under about ten units, self-management is feasible if you are local. Beyond that the operational load usually justifies professional management at 4% to 8% of collections.
Sources & further reading
- National Apartment Association Survey of Operating Income & Expenses
- Freddie Mac Multifamily Outlook
- CBRE cap rate survey methodology
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.