Commercial multifamily — apartment buildings with five or more units — is valued differently from houses. Instead of comparable sales of similar homes, value flows from the income the property produces. That makes underwriting a chain of calculations: start with the maximum possible income, subtract what you realistically will not collect, subtract what it costs to operate, and see what is left to pay the debt and you.
Learn the vocabulary below and you can read an offering memorandum critically instead of taking the broker's pro forma at face value.
From GPR to EGI
Gross Potential Rent (GPR) is the full rent roll at 100% occupancy — every unit rented at market rate, all year. It is the ceiling, not reality.
Effective Gross Income (EGI) is GPR minus vacancy and credit loss (empty units and tenants who do not pay), plus other income like parking, laundry, pet fees, and utility reimbursements. EGI is the money that actually shows up, and it is the base for everything downstream.
Operating Expenses and OER
The Operating Expense Ratio (OER) is operating expenses divided by EGI. For well-run multifamily, 35-55% is the typical range, varying with property age, climate, taxes, and who pays utilities. Treat the OER as a smell test: a pro forma showing 28% expenses on a 1970s building deserves hard questions, because seller pro formas routinely understate repairs, management, and reserves.
EGI minus operating expenses gives you NOI (net operating income) — before debt service, which is deliberate: NOI describes the property, not your financing.
Stabilized NOI
Value-add deals are bought for what they can become. Stabilized NOI is the projected NOI after your business plan is executed — units renovated, rents brought to market, occupancy normalized, expenses cleaned up. It is the number your exit value hangs on. Underwrite the path honestly: renovation costs, months of lost rent during turns, and the real pace of lease-up all sit between today's NOI and the stabilized figure.
Exit Cap Rate and Value
Commercial value follows one formula: value = NOI / cap rate. A property producing $500,000 of NOI at a 6% cap is worth about $8.3 million; the same NOI at a 7% cap is worth $7.1 million. That sensitivity is why the exit cap rate — the cap you assume when you sell — is the most dangerous assumption in any model. A conservative underwriter assumes the exit cap is somewhat higher than today's, so the deal works even if the market softens.
Balloon Maturities
Most commercial loans do not run to full amortization. They come due — balloon — in 5 to 10 years, at which point you must refinance, sell, or pay off the balance. This is a genuine risk: if rates are high or values are down when your maturity hits, you may be forced to transact at the worst possible time. Match your loan term to your business plan and keep a cushion of time between stabilization and maturity.
Price Per Unit and Break-Even Occupancy
Two quick sanity checks round out the toolkit:
- Price per unit — purchase price divided by unit count — is the standard multifamily comp. If similar buildings trade at $150,000 per unit and your deal pencils at $210,000, you need a very good reason why.
- Break-even occupancy is the occupancy at which income covers operating expenses plus debt service. If break-even is 88% and the submarket averages 93%, your margin of safety is thin; a break-even in the 70s gives you room to absorb surprises.
Pulling It Together
These numbers interlock — nudge vacancy, expenses, or the exit cap and watch NOI, value, and returns move together. The free Shouldirefi Deal Analyzer includes a Commercial strategy that runs this full chain from GPR through estimated returns, so you can stress-test a deal's assumptions in minutes instead of building a spreadsheet from scratch.
All figures are estimates for informational purposes only — not financial advice. Consult a qualified professional before making financial decisions.