How do you handle the cap rate gap when underwriting a small multifamily deal?

[StellaT]

I’m looking at a small multi-family property where the seller’s pro forma shows a strong cap rate, but when I adjust for what I believe are the actual market rents and include a more realistic maintenance reserve, the numbers look a lot less attractive. How do you all handle this gap when you’re underwriting a deal?

[Emma.R]

Yep, that gap is real. I start by validating the rent roll against market rents with local comps and broker surveys. If there’s a delta, I model a market rent adjustment and a higher vacancy allowance, then I bake in a real maintenance reserve or capex reserve (often 4–5% of gross income or a separate capex fund). Re-running NOI usually drops the cap rate from the seller’s figure to something closer to what I’d expect. In a recent deal the adjustment knocked the yield down by a couple points, which changed my bid strategy.

[Luke.H]

I’ve sometimes found the culprit isn’t rents at all but expenses in the seller package. I pull market benchmarks for taxes, insurance, and maintenance and reprice those line items to market. Then I run two or three scenarios: flat rents, 2–3% rent growth, and a conservative 0% growth with a solid reserve. The cash flow looks totally different under those, and it makes me rethink debt service assumptions.

[Zachary89]

Sometimes the problem feels like timing or financing more than rents. I’ve had deals where once I added debt service at a market rate and checked the DSCR under the adjusted NOI, the numbers got tight or negative. It’s a reminder to look at financing terms as part of the gap, not just the operating side.

[SavannahIR]

Have you tried a simple sensitivity table on rent delta, vacancy, and maintenance?