Underwrite from evidence
Do not accept a seller’s forward-looking figures as the same thing as actual performance. Reconcile rent roll, prior-year actuals and your own assumptions.
Business · Finance
Rental Property Underwriting: Income, Expenses and NOI
A step-by-step rental-property underwriting guide using an anonymised eight-unit source example to reconcile rent roll, vacancy, operating expenses and net operating income.
NOI is operating income
Net operating income in the supplied worksheet is total property income less operating expenses. It is calculated before financing and investor-specific tax effects.
Anonymised source example
The source contains an eight-unit illustration. Personal resident names have been removed; the financial figures are retained only as a labelled source example.
Start with the rent roll, not the headline income
The supplied worksheet demonstrates a basic but important underwriting discipline: move from unit-level rent evidence to annual property income rather than relying only on a seller’s pro forma.
For each unit, record the unit type, size, current monthly rent, occupancy status and any other information required to explain the revenue. In the anonymised source example, the property has eight units: six one-bedroom units of about 650 square feet and two two-bedroom units of about 750 square feet, for a total of about 5,400 square feet.
The source rent roll totals $3,492 per month, which annualises to $41,904 of gross scheduled rent if the same rent level is maintained for twelve months. This differs materially from the seller’s pro forma gross scheduled rent of $48,000. The gap is the first underwriting question: what specific leases, vacancies, rent increases or assumptions explain it?
Annualised scheduled rentMonthly rent roll × 12 = Annual gross scheduled rent. Source example: $3,492 × 12 = $41,904.
Compare three views of performance
A useful underwriting file separates seller pro forma, historical actuals and buyer projection.
| View | Purpose | Risk |
|---|---|---|
| Seller pro forma | Shows the seller’s forward-looking view of what the property could produce. | May rely on target rents, low expenses or future conditions that have not yet occurred. |
| Prior-year actuals | Shows what was recorded historically. | May contain one-off items, deferred maintenance or conditions that will not continue. |
| Buyer / analyst projection | Shows your own expected operating case based on verified evidence and explicit assumptions. | Can still be wrong; assumptions should be documented and stress-tested. |
In the source, prior-year total income is shown as $41,800, while the buyer projection is $39,451 after applying vacancy and adding other income. The seller pro forma is higher. The underwriting process should explain each difference rather than blending the figures into an average.
Where source data is incomplete, mark the gap. Do not invent a lease term, market-rent growth rate or expense escalation just because the model needs a number. Use a documented assumption and identify the evidence that should eventually replace it.
Model vacancy explicitly
The worksheet applies a 7% vacancy assumption in both the seller and buyer cases.
Vacancy converts gross scheduled rent into expected collected rental income. In the buyer projection, 7% of $41,904 is about $2,933, leaving net rental income of about $38,971 before other income. The seller pro forma applies the same percentage to a higher rent base, producing a larger dollar vacancy allowance but still a higher net rental result.
Vacancy and net rental incomeVacancy allowance = Gross scheduled rent × Vacancy rate. Net rental income = Gross scheduled rent − Vacancy allowance.
The source does not establish 7% as a universal standard. For real underwriting, vacancy should be supported by property history, current occupancy, lease expiries, local market evidence and the condition of units. A fixed percentage can hide timing risk if several units expire at once or if current occupancy is unusually high or low.
Separate other income from rent
The source adds $480 of other income to the rental income schedule.
Other income can be legitimate, but it should be identified by source and tested for repeatability. Examples in real properties might include parking, laundry or service charges, but the supplied worksheet does not specify what the $480 represents. Preserve that limitation rather than inventing a category.
Underwriting should distinguish contractual or recurring income from irregular receipts. If other income is small, the decision may not be sensitive to it; if it is material, obtain evidence. The key control is traceability from the financial model to a real revenue mechanism.
Build the operating expense schedule
The worksheet provides several operating expense categories and compares seller pro forma, prior-year actual and buyer projection.
| Expense | Seller pro forma | Prior-year actual | Buyer projection |
|---|---|---|---|
| Repairs and maintenance | $6,700 | $8,010 | $8,010 |
| Utilities | $3,273 | $3,273 | $3,273 |
| Property taxes | $3,400 | $3,400 | $3,400 |
| Insurance | $1,000 | $1,000 | $1,200 |
| Replacement reserve | $1,200 | Not shown | $1,200 |
| Total | $15,573 | $15,683 | $17,083 |
The buyer projection is deliberately more conservative than the seller pro forma in several places. Repairs and maintenance use the higher historical actual, insurance is increased above the historical figure, and a replacement reserve is included. This is a strong modelling habit: where the evidence indicates a recurring cost, the projection should not remove it merely to improve the purchase case.
Review each expense for scope. Confirm which utilities the property pays, whether taxes are likely to change after a transaction, what insurance coverage and premium are realistic, and whether maintenance figures include deferred work. The supplied worksheet does not provide these supporting documents, so this article cannot verify them.
Calculate net operating income
The source combines projected income and operating expenses to calculate NOI.
NOINet operating income = Total property income − Operating expenses. Source projection: $39,451 − $17,083 = $22,368.
The seller pro forma produces NOI of $29,547; prior-year actuals produce $26,117; the buyer projection produces $22,368. That spread is strategically important. A purchase case based only on the highest NOI would imply a very different value and risk profile from a case based on the more conservative projection.
In this worksheet, NOI is an operating measure before financing. Do not subtract loan principal and interest inside the NOI line if you want to preserve comparability of the property’s operations independent of a specific financing structure. Likewise, investor-specific income tax is not part of property-level NOI in this model.
$29,547Seller pro-forma NOI
$26,117Prior-year actual NOI
$22,368Buyer projected NOI
$7,179Gap: seller pro forma vs buyer projection
Use sensitivity analysis before relying on one projection
A single forecast can hide how quickly the economics change if rent, vacancy or maintenance differs from the base case.
The supplied worksheet does not include a sensitivity table, but it contains the variables needed to create one. As a practical extension, test at least lower rent collection, higher vacancy and higher repairs. Keep these scenarios clearly labelled as analysis rather than source requirements.
For example, because the property is small, one additional vacancy can have a visible percentage effect on rent. A large repair event can also move annual NOI materially. The purpose of sensitivity analysis is not to predict the exact future; it is to identify which assumptions control the decision and how much error the base case can absorb.
| Sensitivity | Question to test | Evidence needed |
|---|---|---|
| Rent | What if current rents cannot be increased as assumed? | Executed leases, comparable rents, tenant turnover and local demand. |
| Vacancy | What if one or more units remain vacant longer? | Occupancy history, leasing time and expiry profile. |
| Repairs | What if historical maintenance understates future work? | Inspection, maintenance records and condition assessment. |
| Insurance / taxes | What if ownership change affects recurring costs? | Current quotations and applicable tax information. |
| Other income | Is the additional income recurring and transferable? | Contracts, statements or operating records. |
Underwriting workflow
Keep the model auditable from unit-level evidence to NOI.
Reconcile the rent roll
Verify units, occupancy, current rent and annualised scheduled rent.
Normalise vacancy
Use a documented assumption supported by history and market evidence.
Verify other income
Identify what generates it and whether it is recurring.
Rebuild expenses
Use historical actuals, current quotations and known changes rather than copying the seller pro forma.
Calculate NOI
Keep financing and investor-specific taxes outside property operating income.
Stress the assumptions
Test the variables that can materially change NOI and the investment case.
Close evidence gaps
Track missing leases, bills, insurance, maintenance records or other documents before final approval.
Can I value the property from NOI alone?
NOI is an important input, but the supplied worksheet does not provide a complete valuation method, financing analysis, capitalisation-rate requirement, tax analysis or legal due diligence. Those areas require additional evidence and, where appropriate, qualified advice.
Should replacement reserves be inside operating expenses?
The source worksheet includes a replacement reserve in its expense schedule. Different analytical conventions may treat reserves differently, so maintain consistency and state the convention used when comparing properties or valuations.
Application checklist
- Reconcile every unit on the rent roll before trusting gross scheduled rent.
- Keep seller pro forma, historical actuals and your projection in separate columns.
- Label the 7% vacancy rate as an illustrative source assumption, not a benchmark.
- Verify the source and repeatability of other income.
- Use evidence for repairs, utilities, taxes, insurance and reserves; do not simply copy seller estimates.
- Calculate NOI consistently before financing and investor-specific taxes.
- Stress-test rent, vacancy and major expense assumptions before relying on the base case.
- Track missing source documents explicitly rather than filling gaps with unlabelled assumptions.
Source basis. Rental-property underwriting worksheet: rent roll, income, expense and NOI schedules. This page is an original handbook synthesis of the supplied materials. Named people, organisations and identifying case details from the sources have been removed. Numerical examples are labelled as illustrative where used.