Evaluating a multifamily property properly takes about an hour of focused work, and it's the single biggest factor in whether a deal actually performs the way you expect. Here's the exact process I walk every buyer client through before we make an offer.
- Step 1 — Start with actual rents, not pro forma. Request the current rent roll: each unit's actual rent and lease expiration. Pro forma figures assume full occupancy at market rate and can significantly overstate real income.
- Step 2 — Request trailing 12-month financials. You want real historical income and expenses, not projections: gross rental income collected, vacancy and credit losses, operating expenses, and the resulting NOI. A seller who won't provide this is a red flag on its own.
- Step 3 — Normalize the expenses. Property management runs about 8-10% of gross rents in KC, even if the current owner self-manages. Budget $500-$1,000 per unit per year for maintenance, and $1,000-$1,500 per unit per year in capital reserves for things like roofs, HVAC, and water heaters. Budget at least 5-8% for vacancy even if the property is currently full. A realistic total expense ratio runs 45-55% of gross rents — if a listing shows 30-35%, the expenses are understated.
- Step 4 — Calculate your own NOI. NOI equals gross rental income times (1 minus vacancy rate) minus operating expenses. Build this number yourself; don't rely on the listing sheet's figure.
- Step 5 — Apply a market cap rate. Property value equals NOI divided by the market cap rate. For KC 2-4 unit properties, that generally runs 6-8% for something stabilized and well-located — rougher locations or properties with deferred maintenance need a higher cap rate to compensate for the added risk.
- Step 6 — Run the debt service numbers. Subtract your annual debt service (principal and interest at a current, achievable rate) from your normalized NOI to get actual cash flow. I look for a Debt Service Coverage Ratio of at least 1.2 — meaning NOI is 20% more than what the debt costs. Below 1.0 means the property doesn't even cover its own mortgage, which is a surprisingly common problem among currently-listed KC properties at asking price.
- Step 7 — Walk the property with purpose. Check the roof's condition and age, the HVAC (age, and whether it's individual units or central), the plumbing (older KC properties often have cast iron or galvanized pipes nearing the end of their life), the electrical panel (fuse boxes or undersized panels are a red flag), the foundation (soil movement is common in this region), and the general condition of the unit interiors. Price any significant deferred maintenance into your offer rather than absorbing it after closing.
Put together, that's the whole process: pull real rent rolls and trailing financials, normalize the expenses, calculate your own NOI, apply a market cap rate to find supportable value, check the debt service coverage, and walk the property to price in anything that needs fixing. About an hour of work per deal, and it's what separates a good buy from a mistake that doesn't show up until six months in.