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"Multifamily properties are valued based on their income — not what the house next door sold for. That's both the challenge and the opportunity: you can engineer value by increasing rents or reducing expenses."
When you buy a single-family rental, the value is set largely by comparable sales in the neighborhood. When you buy a 4-unit apartment building, the value is driven by the income the building generates. This distinction matters enormously — it means you can force appreciation by improving operations, raising rents, or adding income streams.
But it also means the analysis is more complex. Here's the framework experienced multifamily investors use to evaluate properties from duplex to 8-unit.
Why Multifamily Analysis Is Different
Single-Family
- Value set by comparable sales
- One income stream (one tenant)
- High vacancy impact (0% or 100%)
- Typically analyzed with simple cash flow model
Small Multifamily
- Value driven by income (NOI ÷ cap rate)
- Multiple income streams — diversified risk
- Partial vacancy manageable (one of four units empty = 75% occupied)
- Requires full income statement analysis
The Income Statement: Top Down
The analysis flows from gross income down to cash flow in a structured waterfall:
The Complete Worked Example (4-Unit)
4-Unit in Columbus, OH — Asking $420,000
INCOME
OPERATING EXPENSES
FINANCING (25% down, 7.25%, 30yr)
This deal has a very thin margin at current rates. However — see below — the value engineering opportunity through rent increases can change this significantly.
Cap Rate vs. Cash-on-Cash for Multifamily
Cap Rate
NOI ÷ Purchase Price
$25,372 ÷ $420,000 = 6.04%
Compare properties independent of financing. Used to value the asset itself. In Columbus, a 5–7% cap rate on a small multifamily is typical.
Cash-on-Cash Return
Cash Flow ÷ Cash Invested
−$398 ÷ $105,000 = −0.4%
Measures actual return on your down payment and closing costs. Directly impacts how quickly you can reinvest. At current rates, deals that cash flow are harder to find — many investors accept slight negatives in strong appreciation markets.
What Makes a Good Small Multifamily Deal?
| Metric | Target (2026 Market) | Pass |
|---|---|---|
| Cap rate | ≥ 6% | < 5% |
| Cash-on-cash return | ≥ 5% | Negative with no value-add plan |
| Gross Rent Multiplier | < 11× | > 13× |
| Expense ratio | 40–50% of EGI | > 55% |
| Debt coverage ratio (DCR) | > 1.2 (income covers debt by 20%+) | < 1.0 (income doesn't cover debt) |
Due Diligence Beyond the Numbers
Once the numbers look right, verify everything before closing:
- Request 12 months of actual rent rolls and bank statements — don't rely on proforma income
- Review all leases. Understand each tenant's terms, deposit held, and any side agreements
- Get a property inspection covering all units, roof, foundation, HVAC, plumbing, and electrical
- Check city code violation records — code enforcement liens can survive closing
- Talk to the tenants (during the inspection is appropriate). Tenants tell you things sellers don't
- Verify utility billing setup — who pays what, and are there any shared meters that complicate billing?
Marcus Webb
Multifamily Syndicator · 890 posts · REICommunity Contributor
Marcus has analyzed and purchased small multifamily properties across five markets. He teaches multifamily analysis workshops and has reviewed over 400 small apartment deals over his 12-year career.
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