Underwriting is the process of analyzing a property’s numbers to decide whether it makes a good investment. This guide walks through the key steps to underwrite a small multifamily property — specifically a duplex — using conservative assumptions.

1. Estimate Rental Income

• Research rent comps in the same neighborhood, ideally within 0.5 miles.
• Use conservative rent estimates (aim low rather than high).
• Don’t forget to factor in vacancies — assume at least 5% vacancy rate.

2. Estimate Operating Expenses

Use the 50% Rule as a starting point, then refine:

• Property Taxes
• Insurance
• Property Management (~8–10% of rents)
• Repairs & Maintenance
• CapEx (big-ticket items like roof, HVAC, appliances)
• Utilities (if paid by owner)

3. Calculate Net Operating Income (NOI)

NOI = Gross Rental Income – Operating Expenses

NOI is your income before financing costs. This helps evaluate the asset on its own merits, regardless of the loan you use.

4. Factor in Financing

• Use your expected loan amount, interest rate, and term to calculate monthly debt service.
• Tools like our rental calculator can help.
• Calculate your cash flow: NOI – Debt Service.

5. Calculate Your Returns

• Cash-on-Cash Return: (Annual Cash Flow ÷ Total Cash Invested)
• Cap Rate: (NOI ÷ Purchase Price)
• DSCR: (NOI ÷ Debt Service) — lenders want this to be ≥ 1.2

6. Stress Test It

• What happens if rents are $100 lower?
• What if a unit is vacant for 3 months?
• What if repair costs spike?

Underwriting is part math, part judgment. As you grow your portfolio, you'll refine your assumptions. Want help? Contact us or try our free calculator.