top of page
Search

How to Know if an Apartment Building Is a Good Investment

Ever looked at a real estate deal and thought, “I have no idea what any of this means”? You’re not alone.


Investing in apartment buildings can seem complicated at first. But once you understand a few key terms, it becomes much easier—and a lot more exciting.

In this blog, we break down a real 30-unit apartment deal with Matt Faircloth, founder of the DeRosa Group, and their expert underwriter, Hait Patel. They explain each step in simple, beginner-friendly language, so you can learn exactly how the pros evaluate apartment investments.



What Is Underwriting and Why It Matters

Underwriting is the process of analyzing a property to decide if it’s a smart investment. It helps answer three critical questions:

  • Is the property making money?

  • Can it cover its expenses and debt?

  • Is there potential to increase profits?


Whether you’re planning to invest passively or buy your own multifamily property, understanding these basics will help you make better decisions.



Step 1: Review the Property’s Financials

The first thing investors look at is the Trailing 12 months (T12). This report shows the building’s income and expenses for the past year. It’s essentially a financial report card for the property.


Matt and Hait also review the Trailing 6 and Trailing 3 months to spot trends. Is the income going up? Are expenses increasing or decreasing? These numbers tell a story about how the property is performing—and where it might be heading.



Step 2: Analyze the Rent Roll

The Rent Roll lists every unit in the building, what each tenant is paying, and when their lease ends. But there's more to it than just names and numbers.


By comparing the effective rent (what tenants are currently paying) to the market rent (what similar properties in the area could charge), investors can identify value-add opportunities—chances to raise rents after improvements.


To increase rents, investors often use a CapEx (Capital Expenditures) budget—money set aside for renovations like updated kitchens, flooring, or exterior upgrades.



Step 3: Understand the Three Most Important Metrics

These three numbers appear in every underwriting model—and they are essential to understanding any real estate deal:


Net Operating Income (NOI)

NOI is the income a property produces after all operating expenses are paid—but before mortgage payments. It’s a measure of the property's profitability.


Capitalization Rate (Cap Rate)

Cap Rate is a quick way to compare investments. It’s calculated by dividing NOI by the purchase price. A higher Cap Rate can indicate a better return, though it also depends on the market.


Debt Service Coverage Ratio (DSCR)

DSCR measures whether the property earns enough income to cover its debt payments. A DSCR above 1.25 is typically considered strong by lenders. Anything below 1.0 suggests the property isn’t producing enough income to pay its mortgage.



Step 4: Decide If the Deal Is Worth a Closer Look

Before diving into full underwriting, experienced investors ask a few key questions:

  • Does the asking price make sense based on other sales in the area?

  • What is the current Cap Rate?

  • What is the price per unit (also called “cost per door”) compared to similar buildings?

If those numbers are in the right range, it’s worth taking the next step.



Step 5: Understand the Roles in a Real Estate Deal

In larger apartment deals, there are usually two types of participants:

  • General Partners (GPs) – They find the property, manage the deal, and handle the day-to-day operations.

  • Limited Partners (LPs) – They invest money into the project and earn passive returns.


Most deals include a Preferred Return, which means the investors (LPs) get paid first, before profits are split between GPs and LPs. This structure is designed to benefit both sides—and to align interests.



Want to Try It Yourself?

The DeRosa Group has created a free 15-Minute Underwriting Tool that makes it easier to analyze deals. It’s simple to use, and perfect for beginners.



Final Thoughts

You don’t need a finance degree to understand apartment building investments. With a basic grasp of underwriting and a few key terms, you can quickly tell whether a deal is worth pursuing.


Watch the full video with Matt and Hait to see exactly how the pros break down a real deal—step by step. Whether you’re just getting started or looking to sharpen your skills, this is a must-watch.



Glossary: Real Estate Terms Mentioned

  • T12 (Trailing 12): The past 12 months of financials for a property

  • Rent Roll: A list of all tenants, what they pay, and when their leases end

  • NOI (Net Operating Income): Income minus expenses (excluding the mortgage)

  • Cap Rate: A measure of potential return on investment

  • DSCR (Debt Service Coverage Ratio): Can the property cover its loan payments?

  • Value-Add: Improving a property to increase rent and income

  • CapEx: Budget for renovations or major upgrades

  • General Partner (GP): Active managers of the deal

  • Limited Partner (LP): Passive investors who fund the deal

 
 
 

Commentaires

bottom of page