How You Should Underwrite a Multifamily Deal in 2025: An HZF Playbook for Limited Partners
Start With the Macro: Where Are We in the Cycle?
- Demand > Supply (again). CBRE projects average U.S. vacancy finishing 2025 below 5 % as new starts collapse 74 % from their 2021 peak. That tightening backdrop underpins every assumption that follows.*
- Cap-rate reset, not collapse. In most markets Class A assets are trading in the mid-4 % to low-5 % range, Class B/C in the 6-8 % range, with wider spreads in transitional sub-markets—an adjustment forced by higher borrowing costs rather than a structural decline in asset quality.**
Why you should care: Market misreads—buying into a still-peaking supply node or assuming compressed exit caps—are the root of most value-add disappointments.
Trust—but Verify—the Income
Normalizing Expenses—Brutal Honesty Saves Deals
- Taxes: Reassessed at purchase price plus local millage—no “prop-tax freeze” fantasy.
- Insurance: Quoted at today’s rates (coastal Texas premiums doubled since 2022).
- Repairs & Maintenance: Vintage-driven baseline (typically $800–$1,200/unit/year for 1980s stock).
If NOI still pencils after a real expense load, we keep going.
CapEx: Phased, Funded, and Tied to Rent Premia
- Phase 0 – Life-Safety & Deferred: roofs, plumbing stacks, fire panels.
- Phase 1 – Unit Turns: interior refresh at $8–$15 k per unit, released in 15 % tranches to match absorption.
- Phase 2 – Amenity & Tech: smart-locks, EV chargers, solar carports—only if projected IRR survives a 25 % cost over-run stress.
Debt Structure = Optionality
We never accept pre-pay terms that box in a sale once the business plan is executed.
Exit Assumptions: Three Lenses, One Decision
The underwriting must clear LP hurdles for you in the base case, not the upside.
Alignment & Transparency
Quarterly reality-check: Each KPI (rent growth, expense drift, CapEx burn, debt-service coverage) is benchmarked against underwriting; deviations ≥ 5 % trigger an update call between you and my team.
How This Discipline Protects Your Capital
- Valuation cushion from conservative cap-rate expansion.
- Cash-flow resiliency via realistic expenses and rate hedging.
- Execution clarity through phased, fully funded CapEx.
- Optional exits thanks to flexible debt and early performance tests.
Closing Thought
Underwriting is where optimism meets adult supervision. By letting data—not bravado—drive each lever, you should aim to deliver durable returns that outlive today’s headlines.
Next week: I’ll key these concepts I’ve put together for you with an actual underwriting I’m working on right now! We’ll find out in real time if it’s something worth pursuing.
Sources:
[*] https://www.cbre.com/insights/books/us-real-estate-market-outlook-2025/multifamily
[**] https://www.lsglending.com/blog/2025-multifamily-market-trends-and-cap-rates/
(Written July 13 2025 – numbers current as of publishing.)
