In this instructional session, Jonathan Cronin (Speaker A) walks participants through a rapid "napkin" underwriting framework for evaluating multifamily acquisition opportunities in under a minute. The method hinges on five core inputs: market rent, unit mix, expense ratio, renovation cost, and cap rate. Participants calculate Gross Potential Rent (GPR) by multiplying unit mix by market rent and annualizing, then apply an assumed 50% expense ratio to derive Net Operating Income (NOI). NOI is divided by a market cap rate (typically 7%) to estimate a stabilized property value, which is then discounted (often 80%) to determine a maximum allowable offer after subtracting renovation costs. A rule‑of‑thumb check—whether the offer is within 30% of the seller’s asking price—guides whether to proceed to a detailed pro‑forma. The session also highlights common pitfalls (over‑stating market rents, under‑estimating expenses, relying on on‑market listings) and offers practical solutions such as deeper prospecting, rigorous comparable analysis, and normalizing expenses. Throughout, the presenters emphasize speed, disciplined use of time, and the importance of market knowledge.
Chapters
This is one of your highest leverage skill sets right here. The better you get at the napkin analysis, the better you get at seeing a deal quickly. You're at a dinner party with a, with an investor or a seller, or you're at a dinner party with a broker. They're telling you about a deal and we want to be able to have a quick idea in our head. Now, a lot of this comes from market knowledge. So you're going to see what's needed because I think we can I'll do this napkin analysis in less than 60 seconds, but it's going to depend on how much you already know about the market. So what's needed? Market rent, unit mix. So your market rent is what could the property be. That's a very important note, guys. Anytime we're talking about napkin analysis or the pro forma analysis, we're thinking about pro forma, like future projections, right? We're not thinking— we, we will eventually bring into underwriting what the current T12 looks like, what the current rents look like. That is an important metric, But for understanding what we can pay for the property at a high level, understanding what the property can make us, how much money the property can make us, it's really about the future market rents. What is properties around that area already doing? And what, what are comps in that area? So comparables. So the market rents, we're going to research and we're going to find out what could I be making in terms of rents for that property. And then we're gonna do unit mix. So unit mix is just how many of each type of unit, right? How many 2-bedrooms, 1-baths? How many total units? How many 3-bedrooms, 2-baths? How many 1/1s? All that kind of stuff. How many studios? We need to find that out. Then your expense ratio. Now, we're gonna, we typically just assume 50%. We'll talk about, this is gonna be a very important topic throughout this event. All right, and your coaches will be at your tables. We're going to be talking about expense ratio a lot because it seems like a lot of sellers and brokers want to tell you it's possible to be at 30% expense ratio. I don't know how they— I don't know. It still bewilders me that they— it seems like that's a very rampant thing for sellers and brokers. Does anybody know why they do that? Tell you that it can be a 30% expense ratio? Ah, yeah, that's right, that's right. It makes the property worth more, that's what it is. They want to sell it to you for a lot more than it's worth. Okay, so 50% is reasonable. Now 55% is probably even what we're seeing as far as a class see property. So Larry, you have some thoughts?
Yeah, just don't let them trick you because they'll say, oh, the repairs and maintenance are super low. This guy does— him and his kids do all the maintenance. Well, are him and his kids going to work for free for me when I buy the property? Because I got to pay somebody to do it. I'm not going to do it. Or they manage the property. This guy, he's hands-on, you know, or whatever. You know, you got to normalize it for what most properties run like. You know, no different than— you're buying a business, you know, a business that has the owner doing all of the work is not worth much, right?
Yeah, I mean, look, 45%, maybe if it's like Class B, Class A, like nice properties, or maybe if it's a smaller deal, right? Like a smaller, you know, 5, 8-unit deal, stuff like that, right? But for the most part, Class C properties, we need to say 50% is we're not going below that in the napkin side. Okay, then renovations needed. How much approximate renovations are needed? Way we find that is we just ask the brokers, you know, what's the quick way you find renovations for a napkin? And we'll get to renovate— renovations can get kind of tricky. We want to do a quick analysis, speed up submitting offers. We can cut out steps in the process. And then once we get an accepted LOI, we can get the T-12 and rent roll. So T-12, rent roll not needed for the napkin. But once you get more rolling in, then you can be more selective, okay? So quick calculation is unit mix times market rent rates times 12 months equals your gross potential rents, all right? Gross potential rents times your expense ratio, or really it'd be, you know, minus your expenses equals your NOI. So your gross potential rents minus your expense, it equals, it works for times multiplying your expense ratio because it's 50%, right? So 0.5. Times your GPR equals your NOI, right? NOI divided by your cap rate. We're just gonna assume for these examples, 7% cap rate. You can look up on ChatGPT, what's the normal market cap rate, right? Again, this is market cap rate, guys. Don't get this confused with what the broker told you on the OM is the cap rate. There's an in-place cap rate, which is if I bought this deal right now with, you know, you know, cash, what would it return me year over year, right? That's the cap rate, alright? Let's do a deal. Let's do an example. Market rent, 2-bedroom is $1,000. We just discovered it's $1,000. Write this down. Let's see who can get it the first, the fastest. Use your spreadsheet, use your calculator, whatever you wanna do. $1,000. 1-bedroom is $800. So this is what we found out. We can move the rents to $1,000 for 2 bedrooms and $800 for 1 bedroom.
Potential rent.
Potential rents. Unit mix is 50 units, 2-bedroom units. So your $1,000 times your 50 units. And then 70 units are 1-bedroom. So then your $800 times your 70 units.
It's a 120-unit property.
And then add those together. So it's a 120-unit property, yeah. All right? So expense ratio, or just assume 50% here. Renovations needed, $1.2 million. Asking price, $6.2 million. So we're gonna find out, is that a good deal? All right, so who's got unit mix times market rent rates times 12 months? Who's got the gross potential rents?
Yeah, gross potential annual rent, guys.
So you gotta do times 12 months. There it is. You got it.
Boom.
Boom. Great job. All right, so look.
You do 50 units times $1,000, right? Then you do plus 70 units times $800. So 1,000 times 50 is 50,000.
Last month.
800 times 70 is 56,000. 56,000 plus 50,000 is 106,000. Multiply that by 12. That's your GPR.
Woo!
Thomas always wins.
That was good.
He's got these new contact lenses that have a calculator in them. It's pretty cool.
That was good. Human calculator right there. All right. Everybody got 1.2? All right, let's go. Next one. Who's got the next one? Uh, GPR times your expense ratio or minus your expenses?
Well, it should be— so your expense ratio, right? You want to do— you really, to get the NOI, you're going to do GPR times your NOI margin, right? So your NOI margin is just 1 minus the expense ratio.
Yeah, yeah, we just flipped a couple. But like Jonathan said, because it's 50%, it's the same, right?
Yeah, so it'd be— it'd be GPR minus 1 minus expense ratio. So if you're—
for this it works both ways.
If your expense ratio was 60%, you do 1 minus 0.6. Yeah. And then times that by your GPR.
Exactly.
GPR times 1 minus 0.6. It's technically times 0.4, right? That gives you your—
you just get where you do that in your head. If a broker says it's 60% expense ratio, you just multiply gross rent times 0.4, right? Yep.
Yeah, that's it. It's called your NOI margin. The inverse of your expense ratio is your margin.
Same as profit margin.
What's half of 1.2? What is it? All right. Okay. We good. That's our NOI. That's our net operating income. One of the most important numbers commercial real estate. Your NOI divided by your 7% cap rate. Oh, your— that's your market cap rate. That's what you could sell it for in the future. Ideally. $9,085,000. Great job. Now stabilized value. Now we got to apply a discount. This one's going to be 80%. All right, in this example it's gonna be 80%. So what we're gonna do is take that $9 million stabilized value times 0.8, and that's going to be our discount and what's gonna allow us to make money on this deal, right? And be able to get it to the pro forma. So what's our total cost? There it is. All right. Great job. All right, now take your total cost. That's what we've got to be all in for. We don't want to be spending any more money above that, right? So we want to— that's including our improvements. So now we got to back off our renovation cost to be able to make the seller an offer. Okay, so we need to take that $7.2 million total cost. We're going to minus our renovation cost. So who's got the maximum allowable offer? $6,068,000.
$571,000. So in this case, we assume renovations of $1.2 million.
They gave it, that was given. Yeah, that was $1.2 million. $1.2 on the left.
Sorry, $1.2. So now that is our maximum allowed offer. That's what we can send to the seller. Somebody— so the, the idea, here's the rule of thumb for the napkin. So we want to be— for us to continue using our time, remember our time is our most precious resource. Our time is our The first thing we have to invest well if we're gonna be a successful real estate investor. So we gotta decide, do we keep spending time on this deal? The asking price is $6.2 million, and what we typically say is, is it within 30% of the seller's asking price? What we came up with is at least within 30%. If, if it is, we move on to the next phase, the pro forma phase, where we go much deeper If it's not, we can maybe let the broker know, hey, look, we're nowhere near. I don't want to waste your time. You know, this is where we're coming in at. I don't want to be disrespectful, but this is where we're at.
Yeah. Bigger deals, that margin kind of squeezes up a little bit.
Yeah, it was 20%. We grew it a little bit.
Yeah, we did grow it a little bit, but we got to be intense. Okay. And again, Now what we're saying is, is the next— this is just quick back of the napkin. I'm at a dinner party. I'm like doing a quick thing, right? It's not something that's very serious. This is just— I'm doing a quick thing. Is it worth my time? So is this within 30%? Yeah. So yes, it is. So 6 million. Yeah, it's very close. Very close. Within 3%. So we're going to keep going. Problem number 1, looking on market or looking at stabilized properties. And when I say stabilized properties, I mean market, uh, high, you know, market value properties, right? That doesn't have opportunity for value add.
Somebody's already added the value, right?
Somebody's already added the value. Uh, the occupant occupancy can technically be at stabilized, but when I say stabilized, I mean there's no opportunity for value add. And we can all say there's plenty of, there's opportunity for value add anywhere. Um, But we want to be able to justify that 80% discount on there. Okay, so solution, more prospecting. If you are looking online, on market, or looking at stabilized properties, you're probably not finding deals that really pencil out. And so the solution to solving that problem is more prospecting. Stabilized properties typically have lower in-place cap rates, higher occupancy, minimal to no capital expenditure needed. Or no pain, reason or motivation to sell, right? Example, bad management. Problem number 2, assuming too high of a market rent. It's a very big problem right here. Uh, solution is find accurate market comps. So same class neighborhood, you wanna be looking for comparables of properties in the same class neighborhood in your area. Ideally, the closer the better, but, uh, we need to find comparable areas. Our neighborhoods. You can use Google Maps to drive the area. Age of the property is very important as well. You wanna look at the amenities. Are there similar amenities to your property, right? To what you could create, put in your property, or to what it would justify in other properties. So similar amenities, knowing the market to get there faster is also very important.
Just real quick, it's easy to fudge those potential rent numbers either getting skewed from what the broker's telling you, or you looking at getting too optimistic about looking at a nicer property and thinking you can get yours there. But you have to be careful with that. Because if you just miss it by $50 on this 120-unit property at a 7 cap, that's $1 million you're off, right? Yeah. But the good news is if you can increase the rents $50, that's $1 million increase in the property value. Right.
All right, problem number 3. Assuming too low of a market cap rate. Solution: get better comps. Check sold comps. So, you know, 75-25 rule, you know, sold versus, uh, uh, on market. 25 being on market for less than 6 months.
