Multifamily Underwriting: Understanding the Outputs That Actually Matter

Most multifamily underwriting fails quietly. Not because the math is hard, but because the outputs are misunderstood.

Spreadsheets produce dozens of numbers, but only a handful tell you whether a deal is sound or fragile. Good underwriting isn’t about maximizing those numbers—it’s about understanding what they represent, what assumptions feed them, and where they break when reality intervenes.

This page walks through the core underwriting outputs that actually matter in multifamily analysis, how you arrive at them, and what they tell you about risk. If you understand these, you understand the deal.

Potential Gross Income (PGI): Theoretical, Not Earned

Potential Gross Income is the maximum rent a property could generate if every unit were occupied at full rent with no friction. It reflects unit count, unit mix, and assumed market rents.

PGI is a ceiling, not a guarantee of revenue.

Its purpose in underwriting is not to predict performance, but to define scale. Every subsequent income figure flows from PGI, which means any exaggeration here quietly poisons the rest of the model.

Overstated market rents, aggressive post-renovation assumptions, or unsupported “premium” claims inflate PGI early and make everything downstream look better than it should. PGI should be conservative, boring, and easy to defend. If it feels optimistic, it probably is.

Effective Gross Income (EGI): Where Reality Starts

Effective Gross Income adjusts PGI for vacancy, credit loss, concessions, and collection issues. This is the first income number that resembles what the property actually brings in.

EGI matters more than many investors realize because it captures operational friction. Vacancy is not just a percentage—it’s turnover downtime, leasing inefficiency, bad debt, and market softness showing up simultaneously.

Small changes in EGI have outsized effects later. A modest increase in vacancy or loss-to-lease often matters more than years of projected rent growth. When EGI is fragile, the entire deal is fragile.

Net Operating Income (NOI): The Foundation of Value

NOI is the most important output in multifamily underwriting, and the one most often misrepresented.

It is what remains after normal operating expenses are paid, before debt service and capital events. NOI supports debt, determines valuation, and ultimately funds investor returns.

The danger with NOI is omission. Underwriting fails when expenses are treated as static, when recurring capital costs are pushed aside, or when property taxes are not normalized post-acquisition. An overstated NOI makes cap rates lie and valuations inflate without changing a single formula.

If NOI is honest, the rest of the underwriting has a chance. If it isn’t, no level of complexity fixes it.

Levered vs. Unlevered IRR: Where Returns Really Come From

IRR compresses timing, cash flow, leverage, and exit into a single number. That compression is useful—and dangerous.

Unlevered IRR reflects the performance of the property itself, independent of financing. It tells you what the asset earns based on operations and exit assumptions alone. This is where asset quality lives.

Levered IRR incorporates debt. It shows what equity earns after financing effects. The difference between levered and unlevered IRR tells you how much of the return comes from leverage rather than operations.

When that spread is wide, debt is doing much of the work. That can boost returns, but it also increases sensitivity. Deals that rely heavily on leverage often look strong in projections and weak under stress.

Healthy deals do not need leverage to appear attractive. Fragile ones do.

Debt Service Coverage Ratio (DSCR): A Survival Metric

DSCR measures how comfortably a property’s NOI covers its debt service. Lenders focus on it because it answers a simple question: can this property pay its mortgage without strain?

DSCR is not a formality. It’s a stress test.

Coverage that looks adequate in year one often deteriorates as expenses rise, rent growth slows, or interest-only periods end. Underwriting that only clears lender minimums under ideal assumptions leaves little room for error.

Strong DSCR creates options. Weak DSCR removes them. When coverage tightens quickly under modest downside, the deal carries more risk than the headline returns suggest.

DSCR deserves its own explanation in multifamily contexts.

Equity Multiple: The Most Honest Return Metric

Equity multiple answers a blunt question: how many dollars come back for each dollar invested.

Unlike IRR, equity multiple does not hide leverage or timing effects. A 2.0x multiple means you doubled your money. A 1.4x multiple means you didn’t, regardless of how attractive the IRR appears.

Equity multiple is particularly useful when comparing deals with different hold periods. High IRRs with low multiples often rely on leverage and exit timing. Strong multiples usually indicate durable cash flow and real value creation.

Long-term investors underestimate this metric at their own expense.

Net Proceeds: Where Underwriting Reconciles With Reality

Net proceeds at sale represent the actual dollars returned to equity after selling the property, paying closing costs, and retiring remaining debt.

This output reconciles every assumption in the model—NOI growth, exit cap rate, transaction costs, loan amortization, and timing. Small changes here can overwhelm years of projected cash flow.

When a deal’s success depends almost entirely on net proceeds at sale, the outcome is driven more by market conditions than operations. That is not inherently wrong, but it is risk that should be acknowledged plainly.

If net proceeds collapse under modest changes to exit assumptions, the deal was more speculative than it appeared.

How These Outputs Fit Together

These outputs are not independent. They are a chain.

PGI defines scale.
EGI reveals operational friction.
NOI determines value and debt capacity.
DSCR tests survivability.
Unlevered returns show asset quality.
Levered returns reveal financing risk.
Equity multiple measures reward.
Net proceeds reconcile the outcome.

Weakness in one usually shows up in the others. Good underwriting is less about maximizing any single output and more about understanding how sensitive the system is as a whole.

The Point of Underwriting

Underwriting is not about proving a deal works. It’s about discovering whether it survives disappointment.

The goal is not optimism or pessimism, but realism applied consistently. Deals that work after realism are rare. Filtering aggressively is not conservatism—it’s durability.

If a deal still works once these outputs are understood and stress-tested, it may be worth pursuing. If it doesn’t, the analysis has already done its job.

If you want to actually run these scenarios instead of reasoning through them manually, that’s where the underwriting model fits.