Introduction

Creating accurate financial projections for multifamily investments is challenging but essential. While no proforma will perfectly predict actual results, understanding common mistakes can help set realistic expectations and improve investment outcomes. Drawing from nearly a decade of experience analyzing deals across different roles, I’ve identified eight critical errors that frequently undermine multifamily investment analyses.

1. Betting Too Much on Your Exit Price

Many investors make their deals look profitable by assuming a favorable exit capitalization rate. This single assumption can dramatically change a project’s projected returns. Try this exercise: increase your exit cap rate by just one percentage point and see what happens to your returns. Often, they’ll plummet.

Healthy investments should generate returns from multiple sources—ongoing cash flow, growth in that cash flow over time, loan principal reduction, and finally, appreciation. If your projected profits rely predominantly on selling at a high price later, you’re taking on significant risk.

2. Accepting Previous Operating Expenses Without Question

Never simply copy the seller’s operating expenses into your projections, especially for insurance and staffing costs.

Insurance premiums have increased dramatically in recent years, with some carriers abandoning certain markets entirely. The smart approach is obtaining actual insurance quotes before closing rather than relying on historical figures.

Similarly, payroll expenses have risen substantially as quality staff becomes harder to find and retain. Consider your management approach carefully—will you operate more or less efficiently than the previous owner? Consult with professional property managers to develop realistic expense projections and obtain fresh bids for ongoing service contracts.

3. Banking on Future Refinancing

Refinancing can dramatically boost investment returns, but should be approached with extreme caution. This strategy is most appropriate for development projects or major repositionings that genuinely create significant value. I’m immediately skeptical when reviewing deals that project returning all invested capital through refinancing within just a few years.

The current lending environment—with higher interest rates, cautious lenders, softening rental markets, and economic uncertainty—makes refinancing assumptions particularly risky. Some investors are even facing “cash-in” refinances where they must contribute additional capital rather than extracting equity.

4. Miscalculating Property Tax Increases

Property taxes often represent your largest operating expense (frequently exceeding 20% of revenue), yet many investors simply apply a standard percentage increase to current taxes. This approach ignores the reality that property sales typically trigger reassessments based on the purchase price.

Take time to understand the local assessment process, tax rates, and reassessment calendar. Contact the local assessor with questions. I’ve seen deals where published assessments for the following year already showed significant increases, yet the investment analysis projected minimal tax growth—an immediate red flag.

5. Pursuing Excessive Renovations

With rising material and labor costs, understanding which improvements genuinely add value is crucial. Especially in Class C and D properties, there are diminishing returns on renovation investments. Elaborate finishes won’t necessarily command proportionally higher rents.

Conduct thorough rent comparable surveys to understand what renters will actually pay for. Also, beware of pushing rents too close to those of superior properties—if your renovated Class C property is priced near Class B options, tenants will likely choose the better property. Market conditions matter too; in some areas, newer properties are offering significant concessions that make competing on rent difficult.

6. Overlooking Homeownership Alternatives

Always consider homeownership costs in your target market. If your projected rents approach or exceed typical mortgage payments, tenant acquisition becomes much more difficult. This is particularly relevant for larger units, townhomes, and higher-end properties.

While higher mortgage rates have temporarily widened the gap between renting and buying costs in many markets, this factor should still be monitored closely. Most consumers will choose homeownership over renting if monthly costs are comparable and they can qualify for financing.

7. Neglecting Your Cost Basis

Sophisticated investors often say, “Your basis is forever.” While detailed return projections are important, sometimes stepping back to examine your purchase price relative to comparable sales provides valuable perspective. A favorable acquisition price can save a deal that encounters operational challenges.

Ask yourself: Can your investment survive if the business plan doesn’t execute perfectly? Or are you paying so much that everything must go right to generate acceptable returns? Buying at a good price provides crucial margin for error when unexpected challenges arise.

8. Overpaying for Favorable Loan Terms

In today’s high-rate environment, many investors are eager to assume existing loans originated when rates were lower (2.75-4% versus current 6-7% rates). While these favorable terms improve short-term cash flow, they often come at a significant cost—paying a premium for the property.

Carefully evaluate whether the long-term impact of overpaying outweighs the short-term financing benefit. Remember that these assumed loans typically have shorter remaining terms, creating refinancing risk when the balloon payment comes due. As experienced investors emphasize, your acquisition basis ultimately matters more than temporary financing advantages.

Conclusion

These eight underwriting mistakes have become increasingly consequential in today’s challenging market environment. While appreciation and favorable financing previously masked many analytical errors, today’s investors face thinner margins and greater scrutiny. Developing disciplined underwriting practices that avoid these common pitfalls will significantly improve your chances of successful multifamily investments.