5 Underwriting Mistakes That Kill Multifamily Deals

A single bad assumption in your underwriting doesn't just mean a mediocre return—it can mean negative cash flow, missed debt service payments, or a deal that never should have closed in the first place. The scary part? These mistakes usually don't reveal themselves until you're already on the hook.

If you're transitioning from single-family investing into small multifamily or syndications, pay close attention. The margin for error shrinks as deal size grows, and the five mistakes below are the ones I see killing deals over and over again.

Mistake #1: Using Asking Rents Instead of Achievable Rents

Every broker package includes a "pro forma" rent roll showing what the property could generate after you renovate units, push rents, and achieve full occupancy. The problem is that these numbers assume perfect execution—and they're often wildly optimistic.

New underwriters plug these asking rents straight into their model without asking a basic question: are tenants in this submarket actually paying these rents for comparable units right now?

The fix is straightforward but takes work. Pull actual rent comps from CoStar, Apartments.com, Rentometer, or local Craigslist and Facebook Marketplace listings. Make sure you're comparing apples to apples—same bedroom and bathroom count, similar unit condition, same submarket. Then discount for lease-up time and any concessions you'll need to offer to fill units.

Better yet, call a few local property managers and ask what they're actually achieving for similar units. They'll give you ground truth that no data service can match.

Here's the math that should scare you: a $50/unit/month overestimate on a 20-unit building means $12,000 per year in income that exists only in your spreadsheet. Over a five-year hold, that's $60,000 in phantom cash flow that was never real.

Mistake #2: Underestimating Expense Ratios

I've seen countless underwriting models use a flat 35% or 40% expense ratio because that's what some book or course recommended. The problem is that expense ratios vary dramatically based on market, property age, who pays utilities, tax jurisdiction, and a dozen other factors.

Even worse is trusting the seller's trailing twelve months of expenses. Sellers preparing to exit often defer maintenance, self-manage to avoid fees, or benefit from legacy insurance rates that won't transfer to you.

The right approach is to build your expenses from the ground up:

• Property taxes — Don't use the seller's current bill; check with the county assessor to understand how your purchase price will trigger a reassessment
• Insurance — Get an actual quote rather than using a generic estimate
• Property management — Budget 8-10% even if you plan to self-manage initially (because you probably won't forever)
• Maintenance and repairs — Plan for $500-800 per unit per year, adjusted upward for older properties
• Turnover costs — Account for make-ready expenses between tenants
• Utilities — If owner-paid, get copies of actual bills

After you've built your expense budget line by line, add a 3-5% contingency for surprises. There are always surprises.

The impact of getting this wrong compounds quickly. Underestimating expenses by just 5% on a property with $500,000 in NOI means $25,000 per year you thought you had but don't. That might be the difference between a solid cash-flowing asset and a property that barely breaks even.

Mistake #3: Ignoring Capital Expenditure Timing

Most underwriters handle CapEx in one of two ways: they either ignore it entirely or they spread an annual reserve amount evenly across the hold period. Both approaches miss the point.

In reality, capital expenditures don't arrive in neat annual installments. Roofs fail. HVAC systems die. Parking lots need resurfacing. These costs hit at specific moments, often bunched together, and can easily consume multiple years of cash flow in a single stroke.

The right approach is to build an actual CapEx schedule. Get a property condition assessment or do a thorough inspection yourself. Identify the major systems—roof, HVAC, plumbing, electrical, parking lot, appliances—and estimate both their remaining useful life and replacement cost. Then model when those costs will actually hit during your hold period.

This changes your year-by-year cash flow projections significantly. A property might look great in years one and two, then crater in year three when you're replacing the roof and half the HVAC units simultaneously.

The stress test you should run: what happens if the roof fails in year one instead of year five? If that scenario breaks your deal, you're underwriting a hope, not an investment.

Consider this real impact: a $150,000 roof replacement that arrives in year two instead of year seven doesn't just affect that year's returns. It destroys your cumulative cash flow, forces an unplanned capital call, and erodes LP trust in ways that follow you to your next deal.

Mistake #4: Using the Wrong Cap Rate

Cap rates get thrown around constantly in real estate conversations, but most new investors don't understand how much they vary—or how sensitive their returns are to small errors.

A cap rate isn't universal. It varies by market, submarket, asset class, property size, condition, tenant quality, and current capital markets conditions. The 5.5% cap rate you read about in a headline for institutional-grade Class A apartments in Dallas has nothing to do with the appropriate cap rate for a 1970s Class C property in a secondary Midwest market.

The mistake I see constantly is applying a cap rate from a broker's pitch or a news article without validating it against actual closed transactions for comparable properties. Brokers have an incentive to quote aggressive cap rates—it makes their listing price look reasonable.

To get the cap rate right:

• Look at closed comps, not active listings
• Narrow your comp set to properties that match yours in submarket, size, age, and condition
• Talk to local brokers and appraisers about what's actually trading
• When projecting your exit, assume cap rate expansion rather than compression in your base case

The math here is brutal. A 50 basis point error in your exit cap rate—the difference between a 6.0% and 6.5% cap—can swing your projected IRR by 3-5% or more. That's the difference between a deal that clears your return hurdle and one that doesn't.

Mistake #5: Overlooking Loan Terms and Debt Service Sensitivity

New underwriters focus heavily on the interest rate and barely think about everything else in the loan terms. This is a critical blind spot.

Interest rate matters, but so does:

• Amortization period — Affects your actual monthly payment
• Prepayment penalties — Can make an early exit expensive or impossible
• DSCR covenants — Can force action if your NOI dips
• Interest-only periods — Boost early cash flow but leave you with no principal paydown
• Rate adjustments — On floating-rate debt, understand what happens when rates move

The fix: Model your full principal and interest payment, not just interest expense. Understand your DSCR covenant and what happens if your NOI comes in 10% below projection—do you trip a covenant? Can the lender accelerate the loan or force you into cash management?

If you're using floating-rate debt, understand the cost of your rate cap and what happens when it expires. Model a stress scenario where rates are 100-150 basis points higher at refinance.

A loan that requires 1.25x DSCR might feel comfortable when you're underwriting to 1.35x, but what happens if two major tenants leave and your actual DSCR drops to 1.15x? You might be forced into a cash-in refinance—or worse, a distressed sale—at exactly the wrong moment in the market.

The Common Thread

Every one of these mistakes comes from the same root cause: taking inputs at face value instead of validating them against reality.

The pro forma rents are what the broker wants you to believe. The expense ratio is a convenient shortcut that hides important details. The CapEx reserve is a fiction until you map it to actual systems and timelines. The cap rate is a number someone told you, not one you verified. The loan terms are conditions you agreed to without fully modeling their downside implications.

The best underwriters approach every input with healthy skepticism. They ask where each number comes from, whether it reflects reality, and what happens if they're wrong.

This takes time. Validating every assumption in a complex multifamily underwriting model can take hours of research, phone calls, and spreadsheet work. That's time you could spend finding more deals, building investor relationships, or actually operating your properties.

This is why we built UWMatic—to automate the mechanical work of underwriting so you can focus your energy on the parts that actually require human judgment: validating assumptions, stress testing scenarios, and making better investment decisions.

If you're tired of wrestling with spreadsheets and want to underwrite deals faster without sacrificing accuracy, check out how UWMatic works.