The multifamily underwriting glossary

A capitalization rate is a property's net operating income divided by its purchase price, expressed as a percentage, and it represents the unlevered annual yield the property produces at that price.

Cash-on-cash return is the annual pre-tax cash flow after debt service divided by the total equity invested, measuring the yearly cash yield an investor actually receives on their money.

The equity multiple is total cash distributed to investors divided by total equity invested, expressed as a multiple, and it measures how many times an investor gets their money back over the full hold.

An equity waterfall is the contractual sequence of tiers that determines how a real estate deal's cash flow is split between limited partners and the general partner as return thresholds are met.

The internal rate of return is the annualized discount rate at which the present value of a deal's cash flows equals zero, making it the time-weighted compound annual return on invested equity.

A preferred return is a threshold rate of return that limited partners must receive on their invested capital before the general partner participates in profits above their pro rata share.

Yield on cost is stabilized net operating income divided by total project cost including acquisition and capital expenditures, measuring the unlevered yield a business plan produces once complete.

A bridge loan is short-term, usually floating-rate financing used to acquire and reposition a property that does not yet qualify for permanent debt, with the expectation of refinancing once the asset stabilizes.

The debt service coverage ratio is net operating income divided by total annual debt service, and it measures how many times a property's income covers its loan payments.

Debt yield is net operating income divided by the total loan amount, measuring the unlevered return a lender would earn if it foreclosed and took the property back on day one.

An interest-only period is a stretch at the start of a loan term during which the borrower pays only accrued interest and no principal, lowering debt service and raising early cash flow.

Loan-to-value is the loan amount divided by the appraised value or purchase price of a property, expressed as a percentage, and it measures how much of the capital stack is debt.

Capital expenditures are investments in a property that extend its useful life, improve it, or reposition it, and they sit below the net operating income line rather than being treated as operating expenses.

Economic vacancy is the total percentage of gross potential rent not actually collected, including physical vacancy plus concessions, delinquency, non-revenue units, and loss to lease.

Effective gross income is gross potential rent less vacancy, concessions, and credit loss, plus other income such as parking, pet fees, and utility reimbursements.

Gross potential rent is the total annual rent a property would collect if every unit were occupied at full market rent for the entire year, with no vacancy, concessions, or delinquency.

Loss to lease is the difference between a property's market rent and the actual in-place rent on its current leases, representing income the property is contractually unable to collect until those leases roll.

Marking to market is the process of raising in-place rents to prevailing market levels as leases expire, converting loss to lease into collected income over the natural turnover cycle.

Net operating income is a property's effective gross income minus all operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.

The operating expense ratio is total operating expenses divided by effective gross income, expressed as a percentage, and it measures what share of collected revenue is consumed by running the property.

A rent roll is a unit-by-unit schedule of a property's leases showing unit type, square footage, current rent, market rent, lease start and expiration dates, and occupancy status.

Replacement reserves are an annual per-unit allowance set aside for the periodic replacement of major building components such as roofs, HVAC systems, and appliances, deducted as an operating expense by most lenders.

A trailing twelve is an operating statement showing a property's actual income and expenses for the most recent twelve months, and it is the primary evidence base for underwriting a multifamily acquisition.

The exit cap rate is the capitalization rate assumed to apply when a property is sold at the end of the hold period, and it converts projected final-year net operating income into an assumed sale price.

Price per unit is a property's total purchase price divided by its number of units, and it is the standard shorthand for comparing multifamily pricing across deals in a market.

Reversion value is the projected gross sale price of a property at the end of the hold period, calculated by dividing the final year's net operating income by the assumed exit cap rate.

Absorption is the net change in occupied units in a market over a period, measuring how quickly new and existing supply is being leased by tenants.

Rent comparables are recently leased units at competing properties used to establish the market rent a subject property can achieve, adjusted for differences in size, condition, amenities, and location.

A submarket is a geographic subdivision of a metropolitan area that functions as a distinct competitive set, where properties compete directly with each other for the same pool of renters.

The supply pipeline is the volume of multifamily units permitted, under construction, or planned in a market, typically expressed as a percentage of existing inventory.

Due diligence is the contractual period after a purchase agreement is signed during which a buyer inspects the property, audits its financials and leases, and can typically terminate and recover earnest money.

An investment committee memo is the written recommendation presented to a firm's decision-making body, summarizing a deal's thesis, underwriting, risks, and proposed terms in order to obtain approval to proceed.

A letter of intent is a short, generally non-binding document submitted by a prospective buyer that sets out the proposed price and principal terms of a transaction before a purchase agreement is drafted.

An offering memorandum is the marketing document a broker prepares to sell a commercial property, containing property details, financial statements, rent roll summaries, market data, and a proforma projection.

Value-add is an investment strategy that acquires a property with identifiable operational or physical upside and invests capital to raise its net operating income, increasing value beyond market appreciation.