# How to Underwrite a Rental Property: Residential (1-4 Units) vs Commercial (5+ Units)

# How to Underwrite a Rental Property: Residential (1-4 Units) vs Commercial (5+ Units)

The difference between a good real estate deal and a money pit usually comes down to one thing: **underwriting**. It's not glamorous, it's not exciting, but it's the single most important skill you'll develop as a rental property investor.

Underwriting is simply the process of analyzing a property's financials to determine whether it's a good investment at the asking price. But the way you underwrite a **duplex** looks very different from how you underwrite a **20-unit apartment building**. The numbers are different, the lenders are different, and the sources you use to verify assumptions are different.

This guide breaks down exactly how to underwrite both — so whether you're looking at your first duplex or scaling into multifamily, you'll know what to look for and where to find the data.

## Why Underwriting Matters

Every property listing looks good in the seller's marketing materials. But sellers are motivated to present the best possible picture — they'll use "pro forma" rents (what rents *could* be, not what they are), understate expenses, and gloss over deferred maintenance.

Your job as a buyer is to build your **own** financial model based on verifiable data. If the numbers still work after your conservative analysis, you've found a deal. If they don't — you walk away and save yourself years of headaches.

---

## Part 1: Underwriting Residential Properties (1-4 Units)

Residential properties — single-family rentals, duplexes, triplexes, and fourplexes — are where most Canadian investors start. The underwriting process is straightforward, but you need to be disciplined about verifying every assumption.

### Step 1: Determine Market Rent

This is your most important input. If you get rents wrong, nothing else matters.

**Where to check current market rents:**

- **Facebook Marketplace** — Search "apartments for rent" or "rooms for rent" in your target area. Filter by number of bedrooms and price range. This is the most up-to-date source for what's actually being listed right now.
- **Kijiji** — Canada's largest classifieds site. Search under Real Estate → For Rent. Filter by city, bedrooms, and price. Look at listings posted in the last 7-14 days for the most current data.
- **Rentals.ca** — Aggregates listings and publishes monthly rent reports by city and unit type. Good for trend data.
- **CMHC Rental Market Report** — Published semi-annually (April and October). Gives average rents by bedroom count and neighbourhood. The data lags 3-6 months, but it's the most authoritative source.
- **Zumper / PadMapper** — Additional listing sites to cross-reference.

**How to use these sources:**

1. Search for comparable units: same neighbourhood, same bedroom count, similar condition.
2. Collect 5-10 comparable listings.
3. Discard the highest and lowest outliers.
4. Use the **median** of the remaining listings as your estimated market rent.
5. If the property needs renovation, estimate rent at the *current* condition — not what it could be after improvements (unless you're budgeting for those improvements separately).

**Pro tip:** Take screenshots of your comps with dates. You'll need them when talking to lenders and partners.

### Step 2: Estimate All Expenses

This is where most new investors make mistakes — they underestimate expenses. Here's the full list for a residential rental:

| Expense | Typical Range | Notes |
|---------|--------------|-------|
| Property taxes | Varies by municipality | Check the municipal tax assessment portal for exact figures |
| Insurance | $1,200-$3,000/year | Get a landlord policy quote (not homeowner) |
| Utilities (if landlord-paid) | $150-$300/month per unit | Check with local utility providers |
| Maintenance & repairs | 5-10% of gross rent | Higher for older properties |
| Vacancy allowance | 3-5% of gross rent | Use CMHC vacancy rate for your area |
| Capital expenditures (CapEx) | 5-10% of gross rent | Roof, furnace, windows — big-ticket items spread over time |
| Property management | 8-10% of collected rent | Even if self-managing, include this to know true returns |
| Snow removal / lawn care | $100-$300/month (seasonal) | If not included in tenant lease |
| Advertising / turnover costs | $500-$1,000/year | Listing fees, cleaning between tenants |

**The biggest mistake:** Not including CapEx reserves. A furnace costs $5,000-$8,000 to replace. A roof costs $10,000-$20,000. If you're not setting aside money monthly for these inevitabilities, you'll be blindsided.

### Step 3: Calculate Cash Flow

Once you have rent and expenses, the math is simple:

```
Gross Rent (monthly)
- Vacancy Allowance
= Effective Gross Income (EGI)
- Total Operating Expenses
= Net Operating Income (NOI)
- Mortgage Payment (P+I)
= Cash Flow
```

**What's a good cash flow?** Most investors target **$200-$400/month per unit** after all expenses and mortgage. If you're below $100/unit, the margins are too thin — one unexpected repair wipes out your annual return.

### Step 4: Run the Key Metrics

- **Cash-on-Cash Return** = Annual Cash Flow / Total Cash Invested. Target: 8-12%+
- **Cap Rate** = NOI / Purchase Price. Gives you an unlevered return and comparison point between properties.
- **Gross Rent Multiplier (GRM)** = Purchase Price / Annual Gross Rent. Quick screening tool — lower is better.
- **The 1% Rule** (screening only): Monthly rent should be ~1% of purchase price. In expensive Canadian markets (Toronto, Vancouver), this is nearly impossible — use it as a rough filter, not a hard rule.

### Step 5: Stress Test

Before committing, ask:

- What if rates rise 2% at renewal? (Canadian mortgages are 5-year terms — you *will* face this)
- What if vacancy doubles?
- What if a major repair ($10K+) hits in year one?

If the deal survives these scenarios with positive or break-even cash flow, it's resilient. If it goes deeply negative, the margins are too thin.

**Use our free [residential calculator tools](/tools/residential) to model these scenarios quickly.**

---

## Part 2: Underwriting Commercial Properties (5+ Units)

Once you cross the 5-unit threshold, you're in **commercial real estate** territory. The rules change significantly:

- Lenders value the property based on its **income**, not comparable sales
- **DSCR (Debt Service Coverage Ratio)** becomes the primary qualification metric
- Down payments are typically **20-25%** (sometimes higher)
- CMHC offers **MLI Select** insurance for qualifying multifamily buildings (can reduce down payment to 5-15%)
- The seller provides a full financial package: rent roll, trailing financials, utility statements

### The Commercial Underwriting Framework

Commercial underwriting is more structured than residential. Here's the framework:

#### 1. Revenue Analysis

Start with the **current rent roll** — a line-by-line list of every unit, its current rent, and lease status.

Then determine:
- **Market rent per unit** — Is the building above or below market? Use the same sources (Kijiji, Facebook Marketplace, CMHC data), but also reference **CMHC's Housing Market Information Portal** for vacancy rates at the neighbourhood/zone level.
- **Other income** — Parking, laundry, storage, pet fees. These add up on larger buildings.
- **Vacancy rate** — Use CMHC's semi-annual survey data for your specific CMA (Census Metropolitan Area). Don't just guess 5% — verify with actual data.

```
Gross Potential Rent (all units at market rent)
+ Other Income
- Vacancy & Bad Debt Allowance
= Effective Gross Income (EGI)
```

#### 2. Expense Analysis

Commercial properties have a more detailed expense structure:

| Expense Category | Source |
|-----------------|--------|
| Property taxes | Municipal tax assessment |
| Insurance | Broker quote for commercial policy |
| Utilities (common areas + landlord-paid) | Trailing 12-month utility statements |
| Repairs & maintenance | Trailing financials, normalized per unit |
| Appliance reserves | Owner historicals or conservative benchmark |
| On-site management / wages | Local payroll benchmarks or property staff costs |
| Property management fee | 3-6% of EGI (lower % than residential due to scale) |
| Advertising & other | Historicals or benchmark range |

**Key principle:** Use trailing 12-month actuals as your baseline, then adjust upward for items you believe are understated. Never use the seller's pro forma without verification.

#### 3. Net Operating Income (NOI)

```
EGI - Total Operating Expenses = NOI
```

NOI is the single most important number in commercial real estate. It determines:
- The property's value (NOI / Cap Rate = Value)
- Whether you qualify for financing (NOI / Debt Service = DSCR)
- Your return as an investor

#### 4. Valuation

Commercial properties are valued by their income, using cap rates:

```
Property Value = NOI / Market Cap Rate
```

Find market cap rates through:
- Recent multifamily sales in the area (brokers can provide)
- CBRE, Colliers, or JLL market reports
- Municipal assessment data (though this often lags)

If the asking price implies a cap rate well below market, the property may be overpriced. If it implies a cap rate above market, investigate why — there may be hidden problems.

#### 5. Debt Analysis (DSCR)

Lenders for commercial properties care primarily about DSCR:

```
DSCR = NOI / Annual Debt Service
```

- Most conventional lenders require **DSCR of 1.20-1.30** (meaning NOI is 20-30% above the mortgage payment)
- CMHC MLI Select requires minimum **1.10 DSCR** but offers better rates and higher LTV for qualifying buildings (energy efficient, accessible, or affordable)
- Typical terms: 25-30 year amortization, 5-year term, 75-80% LTV

#### 6. Cash-on-Cash and Equity Build

After the debt analysis, calculate:
- **Cash-on-Cash Return** — Same as residential, but target 8-15% for the additional risk and complexity
- **Equity build** — How much principal are you paying down annually through the mortgage?
- **Total return** — Cash flow + equity build + any value increase from rent growth

### Using the Multifamily Underwriter Tool

For commercial deals, we built the **[Multifamily Underwriter](https://mfunderwriter.maplesyrupmoney.com)** — a purpose-built tool that handles the full commercial analysis:

- **Buy & Hold Underwriter** — Input your rent roll, expenses, financing terms, and market cap rate. The tool calculates NOI, property value, DSCR, cash-on-cash, and tells you whether the deal works at the asking price.
- **Value Add Underwriter** — Model renovation scenarios: what happens to your returns if you invest $X in improvements and raise rents by $Y? See how value-add plays out over your hold period.

The tool pulls together all the calculations above into a single dashboard — no spreadsheet required. You input the data from your due diligence (rent roll, expenses from trailing financials, lender terms) and the model runs the full analysis.

**Key inputs the tool needs:**
- Purchase price and financing terms (rate, amortization, LTV)
- Current rent roll (rent per unit)
- Vacancy rate (source from CMHC Housing Market Information Portal)
- Operating expenses broken down by category
- Market cap rate (from recent sales comps)

---

## Residential vs Commercial: Key Differences at a Glance

| Factor | Residential (1-4 Units) | Commercial (5+ Units) |
|--------|------------------------|----------------------|
| Valuation method | Comparable sales | Income approach (NOI / Cap Rate) |
| Primary lender metric | GDS/TDS ratios | DSCR |
| Down payment | 20% (no CMHC for rentals) | 20-25% (or 5-15% with MLI Select) |
| Rent verification | Kijiji, Facebook, Rentals.ca | Rent roll + CMHC data + comps |
| Expense estimation | Rules of thumb + quotes | Trailing 12-month actuals |
| Property management | 8-10% | 3-6% (economies of scale) |
| Complexity | Low — spreadsheet or calculator | Higher — dedicated underwriting model |
| Minimum deal size | $200K-$1M | $1M+ typically |

---

## Common Underwriting Mistakes

Whether residential or commercial, these mistakes sink deals:

1. **Using asking rents instead of market rents.** Always verify independently — sellers inflate rent assumptions.
2. **Ignoring CapEx reserves.** A building with no reserve fund is a ticking time bomb.
3. **Trusting the seller's expense numbers.** Request actual utility bills, tax assessments, and maintenance invoices. If the seller won't provide them, walk away.
4. **Not accounting for the mortgage stress test.** Canadian lenders qualify you at the higher of your contract rate + 2% or the qualifying rate. Budget accordingly.
5. **Falling in love with the property.** Underwriting is emotional protection. If the numbers don't work, no amount of "potential" changes that. Move on.

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## Start Underwriting Today

Good underwriting is the foundation of successful real estate investing. Whether you're analyzing a duplex on Kijiji or a 30-unit apartment building, the principles are the same: verify revenue, account for all expenses, stress-test your assumptions, and only proceed when the numbers work under conservative conditions.

**Ready to run the numbers?**

- Use our [residential calculator tools](/tools/residential) for 1-4 unit properties — mortgage payments, cash flow, affordability, and more.
- Use the [Multifamily Underwriter](https://mfunderwriter.maplesyrupmoney.com) for commercial deals (5+ units) — full rent roll analysis, DSCR, cap rate valuation, and value-add modelling.
- Take our [Real Estate Investing Course](/investing) to learn the full framework, from finding deals to building a portfolio.

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*Not financial advice. For educational purposes only. Consult a licensed financial advisor and real estate professional before making investment decisions.*