Start with achieved rents
The most common error in small multi-family underwriting is using asking rents. Asking rent is a hypothesis. Achieved rent is a fact, and the gap between them widens exactly when the market is turning, which is precisely when you most need the number to be right.
Where units are occupied below market, do not simply model them at market from day one. Massachusetts tenancy rules, notice periods, and the practical reality of turnover all mean repositioning takes longer than a model assumes.
Expenses people leave out
Water and sewer in this region is a substantial line and frequently landlord-paid on older buildings. Common-area heat and electricity likewise. Snow removal is a real cost and a real liability.
Then insurance, which has moved sharply, and taxes, which will be reassessed after your purchase, often upward, toward your purchase price. Underwriting the seller's current tax bill rather than the likely reassessed one is a mistake that shows up in year two.
- Water and sewer
- Common-area heat and power
- Snow removal and landscaping
- Insurance at current, not historic, rates
- Taxes reassessed toward your purchase price
- Management, even if you self-manage. Your time has a cost
Capital expenditure is not maintenance
Routine maintenance is the leaking tap. Capital expenditure is the roof, the boiler, the windows, the exterior envelope. They have different frequencies and vastly different magnitudes, and combining them into a single percentage is how people get surprised.
Build a schedule instead: what each major component is, roughly how old it is, and what replacement costs today. On a pre-war triple-decker with original systems, that schedule frequently exceeds a year of gross rent.
Where deals actually go wrong
Not usually in the rent assumption. Usually in the timeline. Renovations run long, permits take longer than expected, and every month of delay is a month of carry with no income against it.
The second failure mode is leverage sized to the optimistic case. A structure that only works at full occupancy and market rents has no room for the ordinary bad quarter that every building eventually has.
The test worth applying
Run the deal at rents ten per cent below your assumption, with two months of vacancy instead of one, and with the tax bill reassessed. If it still works, you have a deal. If it only works in the base case, you have a hypothesis.
This is the discipline that separates people who own property for thirty years from people who owned it for three.
