Apartment underwriting: reading a T12 like a lender
The trailing twelve, the rent roll, and the eleven adjustments that turn a broker pro forma back into reality. How large multifamily actually gets priced — and the discipline that keeps you from paying for someone else's projections.
How do you underwrite an apartment building? Start from the trailing-twelve-month operating statement (the T12) and the current rent roll — the only two documents that describe the property that exists, as opposed to the one the broker is describing — then rebuild the NOI line by line with your own assumptions: actual collections instead of scheduled rents, taxes reassessed at your purchase price, insurance at today's quotes, real management, and reserves the pro forma conveniently forgot. Value in large multifamily is NOI ÷ cap rate, which means every dollar of fictional income in an offering memorandum is $15–20 of fictional price. Underwriting is the process of finding those dollars before you pay for them.
The documents, in order of honesty
The rent roll tells you who actually pays what, lease-by-lease: in-place rents versus market claims, lease expirations (a wall of expirations in month 3 is a re-leasing risk and a value-add schedule), delinquency flags, and non-revenue units — the model unit, the manager's unit, the two down units the photos skipped. The T12 tells you what the operation actually produced month by month: collections (not scheduled rent), the real expense load, and the seasonal texture — a collections dip every winter, a repairs spike that reveals deferred maintenance being triaged rather than fixed. Read the T12 by month, not as an annual total: sellers time listings after their best two quarters, and the monthly trend is where the story lives. Then demand the supporting cast — bank statements to verify collections, the actual tax bill, current insurance policy, utility bills, service contracts, and payroll. Books that can't support their own numbers are themselves a data point: discount accordingly.
Rebuilding the NOI
- 01Income: start from collectionsGross potential rent (every unit at market) minus loss-to-lease (in-place below market), physical vacancy, concessions, bad debt, and non-revenue units = economic occupancy. A property that is '95% occupied' with 8% delinquency and one month free on new leases is economically ~85% — underwrite that number. Verify other income (fees, laundry, RUBS) against the T12, not the brochure.
- 02Taxes: reassess at YOUR priceThe single most common underwriting kill. The seller's tax line reflects their old assessed value; many jurisdictions reassess on sale at or near your purchase price. Call the assessor, learn the reassessment rules and millage, and model the post-sale bill — on a repriced asset this line alone can move NOI 10%+.
- 03Insurance: quote it, don't trend itMultifamily premiums have repriced violently — coastal and hail-belt properties have seen multi-year doublings. Get a real quote from a broker during diligence. The T12's insurance line describes a policy year that no longer exists.
- 04Expenses: normalize to realityManagement at market (5%+ of collections — even if you'll self-manage, the appraiser and next buyer won't), real payroll for the size, utilities from actual bills, R&M at age-appropriate levels (an owner 'saving' via deferred maintenance shows up as a suspiciously thin repairs line), and replacement reserves of $250–350/unit/year, which brokers omit because they can.
- 05Debt and exit: stress both endsSize the loan at the lender's DSCR floor (typically 1.20–1.25) and stressed rate, not the teaser. Model the balloon refinance at conservative rates. Exit at entry cap +50–75bps. If the IRR only survives at today's cap and tomorrow's perfect execution, the deal is an option on luck.
The judgment calls
Numbers rebuilt, three questions decide the offer. Whose plan are you paying for? In-place NOI supports the price, or the value-add does; pay for the first, get paid for the second. What does the debt permit? Large multifamily lives and dies on maturity timing — agency debt with long fixed periods forgives; bridge debt with a two-year fuse converts every assumption into a deadline. What did diligence change? Underwriting continues through the walk — every unit, not the tour route — where the down units, the galvanized plumbing, and the boiler with two winters left revise the model. If you're raising LP money, this discipline is fiduciary, not personal: the sensitivity table (rents ±10%, exit cap ±75bps, rate at refi ±150bps) is the honest pitch, and a deal that only works in the base case is a waterfall with nothing to distribute.
Frequently asked questions
+What is a T12 in real estate?
The trailing-twelve-month operating statement: actual income and expenses, month by month, for the past year. Together with the current rent roll it's the evidentiary basis of multifamily underwriting — what the property really collected and spent, as against the pro forma's projections. Read it monthly (trends and seasonality), verify it against bank statements, and treat gaps between it and the OM as the seller's negotiating room.
+What is economic vacancy?
Total income lost versus every unit paying market rent: physical vacancy plus loss-to-lease (in-place rents below market), concessions, bad debt/delinquency, and non-revenue units (models, manager units, down units). A '95% occupied' property routinely runs 82–88% economic occupancy — and since value is NOI ÷ cap rate, that gap is worth hundreds of thousands of dollars of price.
+What expenses do broker pro formas understate?
The recurring three: property taxes (quoted at the seller's old assessment instead of reassessed at your purchase price), insurance (quoted at expiring premiums in a repricing market), and management/reserves (omitted or token). Add age-appropriate repairs and real payroll, and the OM's NOI typically shrinks 15–25% under evidence-based underwriting.
+What returns do multifamily investors underwrite to?
Conventions vary by strategy and rate environment, but the discipline matters more than the target: in-place income carrying the debt at the lender's stress test, exit cap 50–75bps above entry, refinance modeled at conservative rates, and the business plan's upside treated as your profit rather than the price's justification. A deal needing every assumption to hit is not a deal — it's a forecast with a mortgage.
+How do you verify a rent roll during due diligence?
Lease audit (every lease against the roll — rents, terms, concessions, deposits), estoppels where obtainable, collections verified against 3–6 months of bank statements, and a full unit walk — all units, not the tour path — to find the down units and deferred maintenance the roll doesn't mention. Delinquency aging and a wall of near-term lease expirations are the two most commonly buried findings.
The value math being priced: cap rates explained. The plan you get paid for: the value-add playbook. Doing this with other people's money: syndications and funds.