Great multifamily underwriting starts with realistic assumptions. This blog reveals three rookie errors investors must avoid in 2026.
Multifamily investing has become increasingly attractive as cap rates rise, pricing softens, and long-term financing remains favorable. But even as more investors transition from single-family into multifamily, many approach underwriting with assumptions that simply don’t hold up in the real world.
Dominion Financial sees the same pitfalls repeated again and again; mistakes that can turn a promising deal into a painful lesson.
If you’re evaluating a 5–50 unit property, here are the three most common underwriting errors to avoid, and how experienced operators actually analyze these deals.
1. Underestimating Expense Ratios
The most common mistake we see from newer multifamily investors is applying expense ratios that belong in single-family underwriting. A spreadsheet showing a 25 percent expense ratio on a building with $1,000 rent may make a deal look attractive, but it is almost always wrong.
Multifamily simply operates with higher baseline costs.
Lower-rent buildings tend to have higher turnover, more physical wear, greater delinquency risk, and more frequent repairs. Management fees are higher as a percentage of rent, and common areas, utilities, and grounds require ongoing attention. When rents fall below a certain threshold, the ratio of maintenance and turnover to gross income becomes almost impossible to compress.
Experienced operators know that a realistic expense ratio often sits far higher than newer investors expect, especially in lower-rent markets. Accurate underwriting begins with accepting the operational reality of multifamily, not the projections we wish were true.
2. Treating Short-Term Rental Revenue Like Long-Term Multifamily Income
Another major mistake is underwriting a building’s revenue based on short-term rental income and then capitalizing that income at traditional multifamily cap rates. Short-term rentals behave more like hospitality than housing.
They have:
- Seasonal occupancy
- Higher turnover
- Higher operating costs
- More volatile demand
- Greater regulatory risk
If a property’s NOI relies on nightly or weekly rental rates, it must be evaluated as a lodging business, not a multifamily asset. Banks, agency lenders, and seasoned investors all treat it this way because the risk profile is fundamentally different.
Capitalizing short-term rental income at a long-term multifamily cap rate dramatically overstates the property’s value, and can mislead investors into believing a building is far more profitable than it truly is.
3. Ignoring the Real Risks of Low-End Multifamily
Even when investors underwrite income and expenses correctly, many underestimate the challenges of C- and D-class multifamily. These buildings often offer the highest-looking cap rates, but they come with operational realities that can erode returns and increase risk.
Half-vacant buildings are common at the lower end of the market, and “mismanagement” is not always the reason. Sometimes the previous owner struggled with collections and credit quality; other times the tenant pool simply lacks stability. High turnover and chronic delinquency can quickly overwhelm cash flow, especially when combined with aging infrastructure and heavy maintenance demands.
Operational costs also run disproportionately high when rents are low. A $900 unit requires nearly the same repair cost as a $1,500 unit, but with far less revenue to absorb it. Add in the risk of concentrated Section 8 tenancy, where 30 or 40 units of vouchers can effectively turn a building into a housing project, and the operational complexity increases dramatically.
This isn’t a judgment on voucher tenants; it’s a recognition that concentrated subsidy housing routinely triggers the same long-term challenges cities have dealt with for decades.
Experienced investors avoid these issues not because they’re unwilling to work hard, but because the margin for error is extremely thin. What looks like a double-digit cap rate on paper often functions like a far lower return in practice.
The Bottom Line: Great Multifamily Deals Start With Honest Underwriting
Multifamily offers scale, strong financing options, and (when analyzed correctly) some of the best long-term risk-adjusted returns in real estate.
But the asset class rewards realism. Investors who assume low expenses, capitalize short-term income like long-term leases, or underestimate the operational challenges of low-end buildings set themselves up for disappointment.
Those who evaluate deals the way experienced operators do, however, can take advantage of meaningful opportunities, especially in today’s 5–50 unit market.
Dominion Financial supports multifamily investors with dependable bridge financing and long-term rental loan solutions designed to align with real-world operations, not spreadsheet optimism. If you’re ready to underwrite these assets the right way, we’re here to help you do it with confidence.
INVESTOR TAKEAWAYS
Multifamily underwriting is the process investors use to evaluate a property’s income, expenses, risks, and financing to determine whether a deal makes financial sense. It focuses on real operating performance, not optimistic projections or assumptions borrowed from single-family investing.
Short-term rental income behaves more like hospitality revenue than long-term housing income. It fluctuates seasonally, carries higher operating costs, and faces greater regulatory risk. Treating that income as stable multifamily rent can significantly overstate a property’s true value.
Low-end multifamily often shows high cap rates, but those returns come with thin margins, higher vacancy, frequent delinquency, and elevated maintenance costs. Because expenses do not decline proportionally with rent, small disruptions can quickly erode profitability.
Investors should underwrite 5–50 unit properties with realistic expense assumptions, conservative income projections, and a clear understanding of tenant stability and management demands. This segment rewards disciplined operators who plan for real-world operations, not best-case scenarios.
Experienced investors prioritize honest assumptions over aggressive projections. They accept higher expense ratios, discount unstable income, and account for operational friction upfront. That realism allows them to avoid problem assets and focus on deals that perform through market cycles.
