ALEX: Welcome to The Local Business Playbook, I'm Alex, and today we're tackling something that a lot of Florida small business owners and local investors have been asking us about — how do you actually underwrite a multifamily apartment building? Like, where do you even start?
JAMIE: And I'm Jamie! Yes, this topic has been in my inbox so many times lately. People are looking at these small apartment buildings — duplexes, fourplexes, maybe a 20-unit complex — and they're like, okay, the numbers have to work, but how do I know if they actually work?
ALEX: Exactly. And underwriting sounds like this intimidating finance word, but really it just means — before you buy this thing, let's stress-test it. Let's make sure it's actually a good deal.
JAMIE: Right! It's basically your due diligence checklist. And we should say upfront — this applies whether you're a first-time investor looking at a small Florida duplex or someone eyeing a larger apartment community. The fundamentals are the same.
ALEX: So let's walk through it. Where does the process actually begin?
JAMIE: It starts with the income side — what is this property actually bringing in? You want to look at the current rent roll, which is just a list of every unit, what it's renting for, and whether the tenant is current on payments.
ALEX: Oh, and I imagine that rent roll can be really revealing. Like, maybe the seller is advertising the property based on what rents could be, not what they actually are right now.
JAMIE: Exactly — that's such a common thing to watch out for. You'll hear the term 'proforma rents' versus 'in-place rents.' Proforma is what the seller thinks you could charge. In-place is what tenants are actually paying today. Always underwrite to in-place rents first.
ALEX: That's a really important distinction. So you've got your actual rent income — what else goes into the income picture?
JAMIE: You also want to capture other income — things like laundry facilities, parking fees, pet fees, storage units. In Florida especially, covered parking or storage can actually add up to real money depending on the market.
ALEX: Right, and then from that gross income number, you have to subtract for vacancies, right? Because no property is ever 100% occupied all the time.
JAMIE: Yes! You apply a vacancy factor — typically somewhere between 5% and 10% depending on the local market. Here in Florida, some markets are super tight right now, but you still want to be conservative and not assume perfect occupancy forever.
ALEX: Good point. So once you've got that effective gross income number — the realistic income after vacancy — then you move to expenses?
JAMIE: Then comes the expense side, and this is where a lot of newer investors get tripped up. You have to account for property taxes, insurance, property management fees, maintenance and repairs, utilities if the landlord pays any, landscaping, pest control — the list goes on.
ALEX: Wait, property management fees even if you plan to manage it yourself?
JAMIE: Yes! And this is actually a really important point — you should always underwrite with a management fee, usually around 8% to 10% of collected rents, even if you're self-managing. Because your time has value, and if you ever want to sell or step back, that cost is real.
ALEX: That's such a smart way to think about it. What about bigger expenses — like capital expenditures, roofs, HVAC systems?
JAMIE: Great question — you want to set aside a CapEx reserve. A common rule of thumb is somewhere between $100 and $200 per unit per year at minimum, but honestly for older Florida buildings where you've got aging roofs and AC systems working overtime in the heat, you might want to be more aggressive than that.
ALEX: Florida AC systems running 11 months a year — yeah, those are not lasting as long as they would in, say, Minnesota.
JAMIE: Ha, exactly! So once you subtract all your operating expenses from your effective gross income, you get to what's called Net Operating Income, or NOI. And NOI is really the heartbeat of the whole underwriting process.
ALEX: NOI — I feel like that term gets thrown around a lot. Can you break down why it matters so much?
JAMIE: So NOI matters because it's what you use to determine value. In commercial real estate — and multifamily is commercial — properties are valued based on their income, not just comparable sales. You take the NOI and divide it by something called the cap rate to get the property's value.
ALEX: Right, and cap rates vary by market. Like, a property in downtown Tampa or Miami is going to have a much lower cap rate than something in a smaller Florida city.
JAMIE: Exactly right. Lower cap rate means investors are willing to pay more for each dollar of income — it reflects lower perceived risk. So if you're buying in a hot market, you'll pay a premium. That's just the reality.
ALEX: So after you've figured out the NOI and the value makes sense — then you look at the financing side?
JAMIE: Right, so you layer in your debt service — your mortgage payments — and that gets you to cash flow. And then you want to calculate your cash-on-cash return, which is basically: how much cash am I getting back each year compared to what I put in as a down payment?
ALEX: And what's a healthy cash-on-cash return? Is there a benchmark investors shoot for?
JAMIE: Most investors want to see at least 6% to 8% cash-on-cash, though in competitive Florida markets right now some deals are penciling out closer to 4% or 5% and people are still buying because they're betting on appreciation. But you want to know what you're getting into.
ALEX: That's honest. And I think that's the whole point of underwriting — not to talk yourself into a deal, but to actually know what you're buying.
JAMIE: Perfectly said. And one more thing people often overlook — the debt service coverage ratio, or DSCR. Lenders use this to decide if they'll even give you a loan. It's your NOI divided by your annual debt service, and most lenders want to see at least 1.25, meaning the property generates 25% more income than it needs to cover the mortgage.
ALEX: Oh that's interesting — so even if you love the deal, the bank has its own underwriting test that you have to pass too.
JAMIE: Exactly! You're essentially underwriting it twice — once for yourself and once for the lender. And if your numbers don't hit that DSCR threshold, you may need to bring more equity to the table or renegotiate the purchase price.
ALEX: This is such a practical framework. I feel like someone could literally pause this episode, pull up a spreadsheet, and start running through these steps on a deal they're looking at right now.
JAMIE: That's exactly the goal! And honestly, the more deals you underwrite — even ones you don't buy — the better your instincts get. You start to develop a feel for what good looks like in your specific Florida market.
ALEX: Love that. Underwriting as a skill you build, not just a one-time checklist. Alright, let's do a quick recap before we wrap — income, expenses, NOI, cap rate, cash flow, cash-on-cash, DSCR. Did we miss anything?
JAMIE: I'd add one final thing — always walk the property physically and review at least two years of actual financials from the seller, not just their projections. Numbers on paper are one thing, but seeing the condition of the units, the neighborhood, the tenant quality — that context is everything.
ALEX: Yes — boots on the ground, always. Alright, this has been such a great conversation. I feel like we could do a whole series just on multifamily investing in Florida.
JAMIE: We absolutely should! And hey, if you want to go deeper on any of these concepts — cap rates, financing structures, finding deals in your local Florida market — head over to our website at TheLocalBusinessPlaybook.com. We've got resources, tools, and more episodes to help you build something real right here in Florida. Thanks for listening, and we'll see you next time!