Multifamily Financial Model: The Assumptions That Drive Returns
The assumptions that matter most in a multifamily model: rents, vacancy, expense ratio, renovation premiums, debt and exit cap rate, with an example.
Key takeaways
- Six assumptions carry a multifamily model: rents, vacancy, expenses, renovation plan, debt and exit cap rate.
- In the example, 100 units at $1,500 produce $1,062,000 of NOI, worth about $19.3M at a 5.5% cap rate.
- Renovate units on the real lease expiry schedule, with downtime, rather than all at once.
A multifamily model has hundreds of inputs, but a handful of them determine whether the deal works. If rents, vacancy, operating expenses, the renovation plan, the debt and the exit cap rate are right, the rest is detail. If any one of them is wrong, no amount of detail will rescue the answer.
Start from the rent roll
Build income by unit type - studio, one-bed, two-bed - using in-place rents from the current rent roll, not asking rents. Record lease expiry dates so that rent increases happen when leases actually turn over.
A worked example
A 100-unit property has an average rent of $1,500 a month.
- Gross potential rent: 100 x $1,500 x 12 = $1,800,000
- Less vacancy and credit loss at 5%: $90,000
- Plus other income (parking, laundry, fees): $60,000
- Effective gross income: $1,770,000
- Less operating expenses at 40% of effective gross income: $708,000
- Net operating income: $1,062,000
At a 5.5% cap rate that income supports a value of about $19,300,000.
The assumptions reviewers test
- Rent growth. A point of growth compounds over a five-year hold. Tie it to evidence for the submarket.
- Vacancy and credit loss. A full building today is not a reason to assume 0%.
- Expense ratio. Check it against comparable properties, and model property taxes and insurance separately because they move on their own.
- Renovation premium. If the plan is to renovate units, show the cost per unit, the rent uplift, the downtime and the pace of turnover.
- Debt terms. Interest rate, interest-only period, amortisation and covenants.
- Exit cap rate. Usually the most sensitive input in the model.
The value-add trap
Renovation plans often assume every unit is upgraded and re-let at the premium rent within a year or two. In practice units can only be renovated as leases expire, each one is empty while work is done, and the premium has to be proven against local comparables. A model that renovates units on the actual expiry schedule gives a slower but far more defensible ramp.
Presenting the model
Show in-place and stabilised income separately, levered and unlevered returns, and a sensitivity table on rent growth and exit cap rate. Our acquisition models follow that layout. For the income calculation in detail, see how to calculate NOI.
Frequently asked questions
What is a typical expense ratio for multifamily?
It varies widely with age, location, taxes and who pays utilities. Ratios in the region of 35% to 50% of effective gross income are common. Compare against similar local properties rather than relying on a rule of thumb.
What vacancy rate should I assume?
Use a rate supported by the submarket and the property's own history, and include credit loss. Many lenders apply a minimum of around 5% regardless of current occupancy.
How do I model a value-add renovation?
Schedule renovations as leases expire, include the cost per unit and the weeks each unit is empty, apply the rent premium only once the unit is re-let, and support the premium with comparable renovated units nearby.