Happening NowMedium Multifamily (5-20 Units)

Working through a DSCR that won't clear on a 10-unit no matter how the numbers get stacked

A useful exercise in underwriting a small rural multifamily deal: a 10-unit building priced by the seller off a stated NOI and cap rate, with real numbers reconstructed independently from bank deposit history rather than the seller's own books. Working it from scratch with a realistic vacancy and credit loss assumption for a thin rural market, and an expense ratio that accounts for the owner paying water, sewer, trash, and heating the common areas, tends to produce an NOI meaningfully below what the seller is claiming. Against a lender's typical terms for this asset class, say 75 percent loan to value, 25 year amortization, a 5 year term, and a 1.25x DSCR requirement, the resulting debt service on a loan sized to that lower NOI often fails the coverage test entirely at the seller's asking price. The useful number to work backward from is what loan amount actually clears 1.25x at the quoted rate, and then what down payment that implies at the asking price. In a market with real underwriting risk and no recent comparable sales to lean on, that down payment often lands well above what would be palatable, sometimes 40 percent or more. Two current vacancies rented at a stated market rate the seller hasn't tested are a real lever, but pro forma rent should never substitute for in-place rent in a DSCR calculation, since the lender will not underwrite to a number nobody has actually collected. The honest next step is usually going back with an offer anchored to the buyer's own reconstructed NOI, not the seller's, since a market with no recent comparable sales gives the buyer little reason to defer to a number they can't verify.

laurenkim53 PF4APRO 14

Answer

nataliehsuServicePRO

You're trying to fix a price with financing. The whole deal is the 10k gap between his NOI and yours.

His 49.6k is 78k gross minus about 28k of expenses, which is a 36 percent ratio and no vacancy line at all. Your 39k is the same gross with vacancy and a 45 percent ratio. Neither of you is lying, you just picked different assumptions, and at a 7.5 cap that 10k is worth about 133k of price. That's the argument, and it's the only argument.

So back into price from the debt test instead of arguing cap rates. 1.25x on 39k NOI means debt service of 31.2k, which at your quoted 7.25 and 25 years is a loan of about 360k. At 75 percent LTV that's a 480k price. That number isn't an insult, it's just what a lender will finance against the income the building actually produces.

Two things I'd nail down before you send anything. First, which expenses are really his and which are the tenants', because owner-paid water and sewer in a rural town with a single master meter is the line that moves your ratio the most, and you can pull three years of utility billing history from the provider with his authorization. Second, the two vacants. If they truly rent at 700 then he should rent them and prove it, and if he won't, that tells you they need work he isn't disclosing.

And on comps: some states don't make sale prices public at all, so if you're in one of those, your appraiser will be leaning on income too. That actually helps you here.

nataliehsuServicePRO

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