How to Analyze a Multifamily Deal: Cap Rates, Cash-on-Cash & NOI Explained

A small misstep in underwriting can turn a fresh acquisition into a career-long headache. The antidote is a disciplined framework, one that converts rent rolls and trailing-twelve statements into a coherent view of risk and reward. Cap rate, cash-on-cash return, and net operating income (NOI) form the backbone of that framework. Get them right and you speak the language of brokers, lenders, and limited partners. Miss the mark and your spreadsheet confidence will crumble the first time the roof leaks or the debt-service reserve runs thin.

This article dissects each metric with the precision of an analyst and the storytelling flair of a seasoned operator. Expect real numbers, quick-glance tables, and a practical case study you can lift straight into your own model.

1.Net Operating Income (NOI)

NOI is the property’s heartbeat - annual revenue that remains after ordinary operating expenses but before financing costs and capital events.

Its elegance lies in this simple equation:

NOI = Gross Operating Income − Operating Expenses

Snapshot of what to include:

• Scheduled rent (after vacancy allowance).

• Laundry, parking, storage, pet fees.

• Property taxes.

• Insurance.

• Repairs & maintenance.

• Contract services (landscaping, pest control, etc).

• On-site payroll or third-party management fee.

• Reserves for replacements.

Reality check: A 50-unit in Columbus, Ohio, collected $610,000 in rent last year. True vacancy averaged 7%. Other income added $23,000. Expenses reached $275,000. The resulting NOI:

Item	Dollar Amount
Scheduled Rent	$610,000
Less Vacancy (7%)	-$42,700
Other Income	+$23,000
Gross Operating Income	$590,300
Operating Expenses	-$275,000
NOI	$315,300

Small changes in vacancy or property-tax assessments ripple straight to valuation because cap rates capitalize NOI. A surprise 15% tax hike on the example above would shave $41,250 from annual NOI - equal to $687,500 in lost value at a 6% cap.

2.Cap Rate

A cap rate is the unlevered yield an investor receives on Day 1, assuming the acquisition price equals fair market value:

Cap Rate = NOI ​/ Purchase Price

Cap rates compress when investors bid up prices or when they accept lower yields for perceived safety and growth. They widen in softer markets, during capital-market turmoil, or when operational risk is rising (think heavy-lift value-add in a tertiary city).

Metro	Class A	Class B	Class C
New York City	4.2%	4.9%	5.6%
Dallas–Fort Worth	4.9%	5.5%	6.3%
Phoenix	5.1%	5.9%	6.7%
Cincinnati	5.6%	6.2%	7.0%
Jacksonville	5.4%	6.1%	6.9%

Cap rate is a blunt instrument; a property with a lower cap is not automatically overpriced.

Perhaps it occupies a booming submarket near a new semiconductor plant, giving rental growth a tail-wind. The metric shines when you compare like for like asset classes in the same location at the same moment in the cycle.

3.Cash-on-Cash Return

Equity cash yield answers the question every limited partner mutters under breath: How much does my wire transfer pay me this year?

Cash-on-Cash = Before-Tax Cash Flow ​/ Total Equity Invested

Where NOI stops before debt, cash-on-cash plunges downstream:

1. Subtract annual mortgage payments.

2. Subtract partnership asset-management fee.

3. Add capital-reserve deposits back only if left in operating account.

4. Exclude refinance proceeds; they are a return of capital.

   
   

Debt sensitivity

Metric	Scenario 1	Scenario 2
Purchase Price	$8,000,000	$8,000,000
NOI (Year 1)	$480,000	$480,000
Loan-to-Value	65%	75%
Interest Rate	4.1%	6.0%
Amortization	30 yrs	35 yrs
Annual Debt Service	$379,000	$493,000
Before-Tax Cash Flow	$101,000	-$13,000
Equity Needed	$2,960,000	$2,000,000
Cash-on-Cash	3.4%	-0.6%

The second column shows how aggressive leverage flips a deal from modest positive yield to bleeding red, despite identical NOI. Rising rates amplify the damage; a single Fed meeting can erase an entire preferred return hurdle.

4.Case Study: The 24-Unit “Elm Court”

Snapshot

• 1970s garden-style, Birmingham metro

• Two-bedroom average rent: $1,045 (20% below renovated comps)

• Trailing-12 NOI: $184,000

• Asking price: $2,650,000

Business plan

1. Inject $9,000 per unit in interior upgrades.

2. Add covered parking at $40 per stall.

3. Move rents to $1,240 within eighteen months.

Pro forma Year 3

Item	Figure
Gross Potential Rent	$357,120
Economic Vacancy 6%	-$21,427
Other Income	+$18,000
GOI	$353,693
Operating Expenses	-$140,000
NOI	$213,693

Assume a 6.25% exit cap in Year 5:

Sale Price ≈ $226,000 (stabilized NOI Year 5) ​/ 0.0625 (Cap Rate) ≈ $3,616,000

Equity return outline

• Purchase price + closing costs: $2,750,000

• Capex: $216,000

• Loan (70%, 5.25%, interest-only 24 months): $1,925,000

• Equity: $1,041,000

Five-year sale after friction costs projects a $1,280,000 net equity proceeds check. Add annual cash distributions totalling $275,000 and the internal rate of return (IRR) lands near 18%. That figure survives a stress test where exit cap drifts 50 bps higher or rent growth lags by 1% CAGR (Compound Annual Growth Rate).

5.Reading the Tea Leaves - Market Signals to Track

1. Treasury yield curve - Short-term rate spikes squeeze floating-rate bridge loans.

2. New supply completions - Excess inventory postpones rent bumps in Sunbelt metros.

3. Property-tax reassessment cycles - Texas counties can revisit valuations yearly, while California’s Prop 13 cap shelters legacy holdings.

4. Insurance premiums - Coastal and hail-risk states saw double-digit jumps in 2023-2025, shaving 40 bps from many class-C cap rates.

5. Employment drivers - A single plant announcement in a secondary market can rebalance occupancy for half a decade.

6.Common Pitfalls and Guardrails

• Ignoring loss-to-lease. New owners inherit existing contracts; step them up methodically to avoid mass turnover.

• Guessing reserve numbers. Use a per-unit annual baseline (often $300-$350) and adjust for vintage.

• Overlooking recapture tax at exit. Straight-line depreciation is fun, until Section 1250 claims 25% on the way out.

• Cap-ex drift. Material costs rarely stay put. Build a 10% contingency inside the raise, not as an afterthought.

• Yield traps. A 9% entry cap in a municipality with falling population may still underperform a 5% cap in a migration magnet.

7.Building Your Own Model

Start with a blank worksheet, import nothing from an older project until logic flows end-to-end:

1. Timeline laid out left-to-right, month columns for year 1, annual thereafter.

2. Revenue line items broken out separately; let formulae sum them into GOI.

3. Expense assumptions occupy a distinct section. Mix fixed and variable categories so they can be stress-tested.

4. Debt module feeds from total project cost; interest expense pulls from outstanding principal to avoid circularity.

5. Return metrics (cash-on-cash, equity multiple, IRR) live on the summary tab, fed solely by referenced cells—no hard-coded numbers.

   
   

A transparent model instills confidence with partners and becomes your early-warning radar when numbers drift off course.

8.Debt Strategy

• Agency fixed-rate: 5.15%-5.60% on stabilized deals over $7.5 M; 30-year amortization; partial IO available.

• Bridge to agency: 6.0%-7.4% floating; often LTC-based; cap-ex heavy; 70-75% advance.

• Local banks: Lower leverage but quicker committee sign-off; recourse typical.

Choosing the right tranche is less about rate bragging rights, more about alignment with hold period and renovation tempo.

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9.Tax Touch-Points - Brief but Vital

• Cost segregation - Accelerated depreciation pulls forward paper losses; 80% bonus depreciation is still in force for assets placed in service this calendar year.

• Qualified Business Income (QBI) deduction - For pass-through owners meeting the safe harbor, up to 20% of rental profit is shielded.

• Opportunity-zone exit - Holding a ground-up project for ten years wipes capital-gain tax on appreciation.

Consult a CPA who lives and breathes multifamily, generic tax advisors may miss quirks such as state-specific transfer-tax credits or energy-efficiency incentives.

10.Pulling It All Together

Cap rate reveals purchase yield; NOI supplies the numerator; cash-on-cash translates financial engineering into wallet money. Each metric answers a different question, and synergy among the trio keeps your pipeline healthy during shifts in both price and policy.

Elm Court’s example shows how a moderate value-add can generate mid-teens IRR while leaving room for economic speed bumps. Trade the numbers for a coastal core trophy and cap rate falls, but projected rental upside might fill the gap. Move to a tertiary shale town and cap balloons—though occupancy risk lurks.

Spend time with raw data, walk comps, and challenge every line in the pro forma. Do this consistently and you will graduate from deal tourist to deal architect—one closing statement at a time.

Credit: (CBRE, Yardi Matrix, Federal Reserve Bank, Freddie Mac)

No Offer or Solicitation

This communication is intended solely for informational and educational purposes. It does not constitute, and shall not be construed as, an offer, invitation, or solicitation to purchase, acquire, subscribe for, sell, or otherwise dispose of any real estate investments, securities, or related financial instruments. Nothing contained herein should be interpreted as a recommendation or endorsement of any specific investment strategy or opportunity. Furthermore, this communication does not represent, and shall not be deemed to constitute, the issuance, sale, or transfer of any real estate interests in any jurisdiction where such actions would be in violation of applicable laws, regulations, or licensing requirements.

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