How we underwrite a small multifamily building
A walk through the actual math on a six-flat: rent roll, real expenses, NOI, the cap rate against financing, and the downside case most pro formas skip.
Most listing pro formas for small apartment buildings are optimistic fiction. Market rents nobody is paying yet, a 5 percent expense line, and no vacancy. Erik spent years as a CFO before real estate, and our team underwrites a building the way an owner's accountant would. Here is the actual process on a made-up but realistic six-flat in Lake County listed at $1,150,000.
Start with the real rent roll
Not the rents the broker says the units could get. The rents on the leases, with lease end dates. Say our six-flat collects $1,450 a month on four units and $1,350 on two, which is $103,200 a year at full occupancy. Then we knock off vacancy and collection loss, 5 percent here, more if the building or the town argues for it. Effective gross income: about $98,000.
Then the expenses nobody likes
- Property taxes: the number one line in Illinois. Pull the actual bill, then underwrite the next general assessment rather than the closing date. Your purchase does not reset the assessment in Illinois, and the buildings that move are the ones carrying a stale assessment when the cycle lands. Lake County reassesses countywide in 2027 and Cook reassesses a third of the county every year. Call it $21,000 here.
- Insurance: $6,500 and climbing everywhere.
- Water, sewer, common electric, scavenger: $7,500 on a building like this.
- Repairs and maintenance: 8 to 10 percent of collections on older stock. $9,000.
- Management: 6 to 8 percent if you are honest with yourself about self-managing. $7,000.
- Reserves for the roof, boiler, and tuckpointing that are absolutely coming: $3,600.
Total expenses: about $54,600, which is 56 percent of effective income. That ratio, not the sticker cap rate, is the first thing we sanity-check. A listing claiming 35 percent expenses on a 1920s brick six-flat is telling you a story.
NOI, cap rate, and the debt
Net operating income lands near $43,400. Against the $1,150,000 ask that is a 3.8 percent cap rate, which is thin. When financing costs more than the cap rate, leverage works against you and you feel it immediately in the debt service coverage ratio, which is the number your lender underwrites to. Run your own quoted rate against this NOI before you get attached to the building. The honest conclusions here are: negotiate the price down toward a defensible cap, find real upside in below-market rents you can document, or pass.
The downside case
Before we recommend any building we run the bad year: one unit vacant for four months, a $15,000 boiler repair, taxes reassessed up 12 percent. If the deal cannot absorb a year like that without you feeding it cash you do not have, it is not a conservative buy, whatever the brochure says. Some of the best money we make for clients is on the buildings we tell them not to buy.
We source multifamily on and off market across Chicagoland and southeastern Wisconsin, and every deal we bring you arrives with this underwrite already done. If you are building toward your first building or your fifth, tell us your target numbers and we will tell you what actually clears them.
Written by the Gimbel Group at Compass. Figures last checked July 27, 2026. Questions about your specific situation: 847-530-3704 or erik.gimbel@compass.com.