Multi-Unit Property Analyzer

How to Underwrite a Duplex, Fourplex, or Apartment Building

A multi-unit property is worth what its net operating income supports. Work down from gross rent to NOI to cash flow, check the result per unit, and then match the building to the right loan: buildings of two to four units can use residential mortgages (including low-down-payment owner-occupant loans), while five or more units need commercial financing that leans on the property's income.

This analyzer walks the same waterfall a commercial underwriter uses. Gross scheduled rent is reduced by a vacancy allowance to get effective gross income; operating expenses (taxes, insurance, management, maintenance, utilities) are subtracted to get net operating income (NOI); and the mortgage payment comes out last to leave cash flow. From those figures it derives the four metrics every lender and serious buyer will ask about: cap rate (NOI divided by price), cash-on-cash return (annual cash flow divided by cash invested), debt service coverage ratio (NOI divided by annual mortgage payments), and the operating expense ratio.

The discipline the waterfall enforces is separating the property from the financing. NOI and cap rate describe how good the building is regardless of your loan; cash-on-cash and DSCR describe whether your particular financing structure works. A great building with too much leverage still fails.

2-4 Units vs 5+ Units: Residential vs Commercial

The most important line in multifamily is between four and five units. It changes how the property is financed, how it is appraised, and who your competing buyers are.

Two to four units

• Treated as residential property. Eligible for FHA and VA loans and for conventional loans sold to Fannie Mae and Freddie Mac, typically with 30-year fixed rates.
• Owner-occupants get the best terms. FHA requires a minimum investment of 3.5% (HUD Handbook 4000.1), and Freddie Mac's published conforming limits allow up to 95% loan-to-value on two- to four-unit primary residences, i.e. 5% down, for borrowers and loans that meet its other requirements.
• Investors buying without living there generally need a larger down payment, commonly 20-25% on conventional loans; check current requirements with your lender.
• Appraised mainly by comparable sales, with an income approach on the small residential income property appraisal form (Fannie Mae Form 1025 / Freddie Mac Form 72). Your buyers will include owner-occupants who may pay more than pure investors.

Five or more units

• Financed with commercial or multifamily loans from banks, credit unions, agency multifamily programs, or private lenders. Underwriting focuses on the property's NOI and DSCR as well as your experience and finances.
• Terms are often shorter (for example a 5-, 7-, or 10-year term with a longer amortization and a balloon payment), and some loans carry prepayment penalties. Read the term sheet closely.
• Valued primarily by the income approach: NOI divided by a market cap rate. That cuts both ways. Raising NOI raises value directly, and a seller's inflated NOI inflates the asking price.

For a side-by-side of loan types, see traditional vs portfolio vs hard money loans and the financing calculator.

Owner-Occupied 2-4 Units With FHA

FHA financing is the most common way first-time investors buy a small multifamily, because the down payment is so low. The core rules come from HUD Handbook 4000.1 (the FHA Single Family Housing Policy Handbook):

• Occupancy. At least one borrower must occupy the property within 60 days of signing the security instrument and intend to continue occupancy for at least one year.
• Down payment. The borrower must make a Minimum Required Investment of at least 3.5% of the adjusted value (with a credit score of 580 or above; lower scores require more).
• Rental income. When there is no rental history, the lender may count 75% of the lesser of the appraiser's fair market rent or the lease rent for the other units as income.
• Reserves. For three- and four-unit properties, the lender must verify reserves equal to three months of the full mortgage payment after closing.
• No short-term rentals. The borrower signs form HUD-92561 agreeing that a two- to four-unit property will not be rented for periods of less than 30 days.
• Loan limits. FHA maximum loan amounts are set by county and are higher for more units. Check the current limit for your county before you shop.

The self-sufficiency test for three and four units

Triplexes and fourplexes face one more hurdle. HUD Handbook 4000.1 defines Net Self-Sufficiency Rental Income as the appraiser's estimate of fair market rent from all units, including the unit you will live in, minus the greater of the appraiser's estimate for vacancies and maintenance or 25% of that rent. The full monthly payment of principal, interest, taxes, and insurance (PITI, which for FHA includes the monthly mortgage insurance premium) divided by that net figure may not exceed 100%. Duplexes are not subject to this test. You can read the rule in the HUD 4000.1 handbook on HUD.gov.

In expensive markets this test is often the binding constraint: a fourplex can fit your income and still fail because its rents are too low relative to its price. A larger down payment lowers PITI and can bring a borderline building into compliance.

Per-Unit Metrics That Matter

Totals hide problems. Divide everything by the number of units and compare against similar buildings:

• Price per unit: the quickest way to compare listings of different sizes in the same area.
• Rent per unit and per square foot: checks whether the rent roll is in line with the market (see the rent estimator).
• Operating expenses per unit per year: reveals missing costs. If a seller's total implies a few hundred dollars per unit per year for taxes, insurance, and repairs combined, something has been left out.
• NOI per unit: what each unit contributes before financing.
• Cash flow per unit per month: your cushion. One turnover can cost a month of rent plus cleaning and repairs, so a thin per-unit figure means one bad month wipes out a quarter.
• Gross rent multiplier (price ÷ annual gross rent): a rough screen, not a valuation, because it ignores expenses.

A Worked Example: Eight Units

Take a hypothetical eight-unit building listed at $760,000 ($95,000 per unit) with units renting for $1,350. Gross income is $10,800 per month; at 8% vacancy, effective gross income is $9,936. Monthly expenses run $3,494: $900 property tax, $350 insurance, 10% management ($994), $600 maintenance, $450 owner-paid utilities, and $200 other. That leaves an NOI of about $6,442 per month, or $77,300 per year, a 10.2% cap rate.

With 25% down ($190,000) and a $570,000 loan at 7% over 30 years, the mortgage payment is roughly $3,792, so monthly cash flow is about $2,650, or $331 per unit. Annual cash flow of $31,800 on $190,000 invested is a 16.7% cash-on-cash return, and DSCR comes in near 1.70. Those numbers are strong enough that the first job is to verify them: a cap rate well above local sales usually means an expense is missing. If the same building were priced at $950,000, the cap rate would drop to 8.1% and the cushion would shrink fast, which is exactly the sensitivity this calculator lets you test before you write an offer. As a five-plus unit building, it would also need a commercial loan, so confirm the rate, term, and DSCR requirement with a lender rather than assuming 30-year fixed terms.

A Worked Example: A Fourplex Two Ways

Hypothetical fourplex: price $520,000 ($130,000 per unit), four two-bedroom units with an appraiser's market rent of $1,350 each ($5,400 a month, $64,800 a year). Property taxes are $650 a month and insurance $250 a month.

As an investor purchase. Allow 5% for vacancy: effective gross income is $61,560. Annual operating expenses: taxes $7,800, insurance $3,000, repairs and maintenance $4,800 ($100 per unit per month), management at 8% of effective gross income $4,925, owner-paid water and trash $2,400, and a replacement reserve of $1,200. Total: $24,125, an operating expense ratio of about 39%. NOI is $37,435.

• Cap rate: $37,435 ÷ $520,000 = 7.2%.
• Gross rent multiplier: $520,000 ÷ $64,800 = 8.0.
• Per unit: NOI $9,359 a year; expenses $6,031 a year.
• Financing: 25% down ($130,000), $390,000 loan at 7% for 30 years = $2,594.68 a month, $31,136 a year.
• DSCR: $37,435 ÷ $31,136 = 1.20, right at the edge of many lenders' minimums.
• Cash flow: $37,435 - $31,136 = $6,299 a year, or about $131 per unit per month.
• Cash-on-cash: $6,299 ÷ $130,000 = about 4.8% before closing costs.

That is a modest investor deal: positive, but with little margin if a unit sits empty for two months or the roof needs work.

As an FHA owner-occupant purchase. With 3.5% down ($18,200), the base loan is $501,800. At an assumed 6.5% for 30 years, principal and interest is about $3,172. Add $650 taxes, $250 insurance, and an illustrative $230 monthly mortgage insurance premium (get the real figure from your lender): PITI is about $4,302.

Self-sufficiency test: market rent of $5,400 minus 25% ($1,350) leaves $4,050 of net self-sufficiency rental income. $4,302 ÷ $4,050 = 106%, which exceeds the 100% limit, so this fourplex fails at these numbers. If market rents were $1,450 per unit, the net figure would be $4,350 and the ratio 99%, a pass. A larger down payment that lowers PITI below $4,050 would also work. Running this arithmetic before you make an offer saves an appraisal fee on a building FHA will not insure.

If it does pass, the house-hacking math is different from the investor math: you live in one unit, so only three rents offset your payment. The house hacking calculator is built for that case.

Expense Assumptions Make or Break the Analysis

Most bad multifamily purchases trace back to optimistic expense assumptions, not bad buildings. Seller pro formas routinely omit management (budget for it even if you self-manage, because your time has value and lenders underwrite it anyway), understate maintenance on older buildings, and quote last year's property taxes rather than the reassessed amount after your purchase. As a rough rule of thumb, stabilized small multifamily often runs an operating expense ratio somewhere around 35 to 50 percent of effective gross income; if your inputs produce 25 percent, the more likely explanation is a missing expense than a miracle building. The expense ratio calculator shows how to rebuild a seller's numbers line by line.

Common Mistakes

• Underwriting at 100% occupancy. Always include vacancy and credit loss.
• Assuming residential loan terms on a fiveplex. Commercial loans can carry balloons, adjustable rates, and prepayment penalties.
• Skipping the self-sufficiency math on an FHA triplex or fourplex until after the appraisal.
• Trusting the rent roll without leases. Verify every rent, deposit, and lease date, and check for concessions or relatives paying below market.
• Ignoring local rules. Some cities have rent control, registration, or inspection programs that apply to multifamily; check the state legal guides and your city.
• Forgetting capital needs. Shared roofs, boilers, sewer lines, and parking lots are expensive. Get inspections and budget reserves.

Related Tools and Guides

Work through the due diligence checklist before you commit, and read the multi-unit property calculator guide for more on each input. If you already own a small multifamily and are weighing a sale or a 1031 exchange into a larger building, compare the options in the keep-or-sell rental property calculator and the 1031 exchange calculator. The scaling playbook covers how small buildings fit into a larger portfolio.

This page is general information, not lending, legal, or tax advice. Loan program rules change and lenders add their own requirements; confirm current terms with a licensed lender and consult a qualified professional about your situation.