The Hidden Costs of Bad Underwriting in Multifamily Real Estate

The Hidden Costs of Bad Underwriting in Multifamily Real Estate

bad-underwriting-multifamily-virginia-costs-and-corrections

In a Tight Market, Bad Underwriting Is the Silent Killer of Returns.

You don’t lose money when you buy.
You lose it when you underwrite like it’s still 2021.

Across Virginia—from Richmond to Norfolk—investors are sitting on deals that looked great on paper… until interest rates moved, rent assumptions flopped, or OpEx swallowed the pro forma.

The real danger? Most investors don’t realize they’ve misjudged the deal until it’s too late to adjust.

Here’s how to spot bad underwriting before you sign—and how to underwrite like a pro in today’s market.

5 Red Flags in Multifamily Underwriting Today

🚩 Aggressive Rent Growth Projections
If the model needs 7% rent growth to break even, it's not a business plan—it's a wish.

🚩 Static Expense Assumptions
Operating costs are rising. Insurance. Payroll. Property taxes. If your OpEx line is flat year-over-year, start over.

🚩 Overleveraged Capital Stack
Bridge debt and preferred equity can make deals look better. But when rates move or performance lags, that stack starts to crack.

🚩 Skipping Sensitivity Analysis
Every deal today needs downside, base, and upside cases—period. One spreadsheet isn’t enough.

🚩 Ignoring Lease Trade-Out Trends
What matters isn’t the average rent—it’s what new tenants are actually paying. If your model assumes full trade-out, but 50% of renewals are concessions? You’re exposed.

How Virginia Investors Are Correcting Course

✔ Underwriting with Real-Time Comp Data
Investors are pulling real rent rolls and lease logs—not just CoStar medians. What a tenant signed last week tells the truth.

✔ Modeling Insurance & Tax Escalations
Savvy buyers are now building in +15% insurance increases and re-assessing real estate taxes post-sale.

✔ Stress Testing Exit Cap Rates
Every model includes an exit cap 50–100 basis points above today’s market norm to reflect risk in 3–7 years.

✔ Focusing on Operational Levers
More buyers are underwriting rent growth of 0–2% and focusing on value-add upside through utility recapture, unit renovations, or staffing efficiencies.

What Good Underwriting Looks Like in 2025

• DSCR at actuals, not pro forma
• CapEx schedules phased across real timelines—not completed in 6 months
• Vacancy assumptions adjusted for tenant profile and unit condition
• Exit price sensitivity modeled against market cap rate expansion
• Built-in buffers for unknowns (especially in older assets)

Markets Where Underwriting Discipline Pays Off in Virginia

📍 Richmond: Infill assets with real upside in under-managed portfolios
📍 Norfolk: Strong absorption—but only when lease trends are correctly captured
📍 Portsmouth & Hampton: Deep value-add territory, but underwriting needs precision on rent comps and capital needs
📍 Chesapeake: Favorable for buy-and-hold investors focused on stable income with inflation-proof leases

Bottom Line: Bad Underwriting Looks Cheap Until It Gets Expensive.

In a shifting market, spreadsheets don’t close deals—smart models do.
And the best investors in Virginia know their model is their moat.

Need a Second Set of Eyes on a Deal?
I underwrite deals daily—and help my clients pressure-test every assumption. Let’s break down your next investment before you break ground.

‍