Key Takeaways
- Five metrics form the complete underwriting toolkit: NOI, Cap Rate, Cash-on-Cash, DSCR, and IRR.
- The 20-unit benchmark: NOI $140,220, Cap Rate 7.01%, CoC 11.1%, DSCR 1.46x, IRR ~22%.
- Every assumption in a pro forma—rents, vacancy, expenses, growth rates, exit cap—must be individually validated.
- No single metric tells the full story; institutional investors evaluate all five metrics plus qualitative factors.
This lesson consolidates the core underwriting concepts, formulas, and the 20-unit pro forma case study covered in Track 1. Use the review questions to validate your understanding of the income waterfall, the five core metrics, and pro forma construction before advancing to applied underwriting practice in Track 2.
Essential Formulas Recap
The income waterfall flows from GPR through vacancy and other income to EGI, then subtracts operating expenses to reach NOI. NOI = EGI − OpEx. Cap Rate = NOI / Price, expressing unlevered yield. Cash-on-Cash = BTCF / Equity, measuring levered current return. DSCR = NOI / Debt Service, quantifying debt safety. IRR captures total levered return over the holding period, incorporating cash flow, appreciation, and loan paydown. The Equity Multiple measures total return magnitude: Total Distributions / Total Invested.
Why it matters: NOI = EGI − Operating Expenses Cap Rate = NOI / Purchase Price Cash-on-Cash = BTCF / Total Equity Invested DSCR = NOI / Annual Debt Service BTCF = NOI − Annual Debt Service Equity Multiple = (Total Cash Flow + Net Sale Proceeds) / Initial Equity IRR: Solve for r where NPV of all cash flows = 0
20-Unit Case Study Key Numbers
The reference property: 20-unit apartment, $2,000,000 purchase price, $1,000/unit/month rents. GPR $240,000, 5% vacancy, other income $2,220, EGI $230,220. Operating expenses $90,000 (39.1% OER). NOI $140,220. With $1,600,000 loan at 6.5%/30-year: debt service $96,000, BTCF $44,220. Cap Rate 7.01%, Cash-on-Cash 11.1%, DSCR 1.46x. Five-year hold with 2% rent growth and 7.25% exit cap yields approximately 22% IRR and 2.34x equity multiple. These numbers serve as your reference benchmark for the applied and advanced tracks.
Why it matters: Understanding this concept is essential for making informed investment decisions.
Key Takeaways
- ✓Five metrics form the complete underwriting toolkit: NOI, Cap Rate, Cash-on-Cash, DSCR, and IRR.
- ✓The 20-unit benchmark: NOI $140,220, Cap Rate 7.01%, CoC 11.1%, DSCR 1.46x, IRR ~22%.
- ✓Every assumption in a pro forma—rents, vacancy, expenses, growth rates, exit cap—must be individually validated.
- ✓No single metric tells the full story; institutional investors evaluate all five metrics plus qualitative factors.
Sources
- CBRE — Cap Rate Survey(2025-01-15)
- NCREIF — Property Index(2025-01-15)
- National Apartment Association — Survey of Operating Costs(2025-01-15)
- IREM — Income/Expense Analysis(2025-01-15)
- Zillow Research — Zillow Observed Rent Index (ZORI)(2025-01-15)
Common Mistakes to Avoid
Memorizing formulas without understanding the income waterfall sequence that connects them
Consequence: Errors cascade through the pro forma when one upstream assumption is wrong but downstream formulas are applied mechanically
Correction: Trace every metric back through the waterfall: GPR to EGI to NOI to BTCF—understand which inputs drive each output
Using a single metric like Cap Rate as the sole basis for an investment decision
Consequence: Cap Rate ignores financing structure, cash flow timing, and exit assumptions, producing incomplete analysis
Correction: Evaluate all five core metrics together (NOI, Cap Rate, Cash-on-Cash, DSCR, IRR) and stress-test each independently
Test Your Knowledge
1.A property has EGI of $500,000 and operating expenses of $200,000. What is the NOI?
2.A property has NOI of $150,000 and annual debt service of $120,000. What is the DSCR?
3.Which metric captures appreciation, loan paydown, and the time value of money?
4.In the 20-unit example, what is the Cash-on-Cash return using a $400,000 equity investment?