Understanding Multifamily Underwriting Assumptions
Vacancy, Turnover, and Real Cash Flow
In multifamily investing, everyone talks about rent growth. It gets the headlines, it drives broker underwriting, and it is where most investors try to build upside into a deal. Rent growth matters, but it is nowhere near as powerful as vacancy and the hidden costs of tenant turnover. In many cases, modest rents with strong retention produce more real cash flow than aggressive rent bumps that trigger churn.
Vacancy Comes in Two Forms
Most models treat vacancy as a single line item: remove 5% from gross rents and call it a day.
Gross Rent Roll: $10,000
Less 5% Vacancy: ($500)
Effective Gross Income: $9,500
That approach works when the assumption is simply that not every unit will be full at every moment. But it misses the second form of vacancy, which is turnover – anytime a tenant does not renew, the unit must be cleaned, refreshed, marketed, and re-leased.
Turnover is not just downtime. It is downtime plus cost.
Estimating Turnover Cost
If the average tenant stays for 4 years, turnover is 25%. We estimate the operational impact like this:
| Turnover Rate: | 25.0% |
| Vacant: | 1 Month |
| Broker Fee: | 1 Month |
| Share of Annual Rent: | 16.7% |
| Total Annual Turnover Expense: | 4.2% |
On newer buildings, we often see more concessions such as a free month of rent, which increases this cost further. That cost is a meaningful reduction to collected rent.
Key Takeaway
Rent growth only matters when tenants stay. If turnover is elevated, rent growth becomes mathematically irrelevant.
Below are two scenarios:
Higher rent growth, but a tenant leaves — creating 1 month of vacancy and 1 month of broker fees
Very low rent growth, but the tenant never leaves — so there is no vacancy and no leasing cost
Both contain four years of results and calculate total net rent collected.
Rent Growth vs Turnover: The Math
Scenario A: Higher Rent Growth With Turnover
(1 Month Vacant + 1 Month Broker Fee)
| Year | Monthly Rent | Annual Increase | Turnover | Annual Rent Collected |
|---|---|---|---|---|
| 1 | $2,000 | – | – | $24,000 |
| 2 | $2,050 | 2.5% | – | $24,600 |
| 3 | $2,101 | 2.5% | 2 months | $21,013 |
| 4 | $2,154 | 2.5% | – | $25,845 |
Total Rent Collected: $95,458
Scenario B: Minimal Rent Growth, No Turnover
| Year | Monthly Rent | Annual Increase | Turnover | Annual Rent Collected |
|---|---|---|---|---|
| 1 | $2,000 | – | – | $24,000 |
| 2 | $2,010 | 0.5% | – | $24,120 |
| 3 | $2,020 | 0.5% | – | $24,241 |
| 4 | $2,030 | 0.5% | – | $24,362 |
Total Rent Collected: $96,722
What This Means
Scenario A raised rents aggressively, but the cost of one non-renewal wiped out the benefit.
Scenario B barely raised rents, but collected more money overall because the tenant stayed in place.
Every turnover event is effectively two months lost: one month vacant + one month leasing cost.
For Scenario A to match the total rent collected in Scenario B, annual rent growth would need to be 3.4% every year when turnover is 25%.
While some markets may experience that level of rent growth in some periods, that is far beyond what most investors (and tenants) plan for.
In other words:
Higher rent growth does not improve outcomes if it causes turnover.
This is why every multifamily model should separate permanent vacancy (inability to fill a unit) from turnover vacancy (leases that do not renew).
Final Thought
Most underwriting models treat vacancy as a single %, which hides the real economic impact of turnover. Rent growth only matters when tenants stay, and steady occupancy produces real cash flow.
UnderwritRE solves this by allowing users to separate permanent vacancy from turnover and break down each component — broker fees, free months of rent, and the time it takes to re-lease a unit. This makes cash flow modeling far more accurate and gives investors a clearer picture of real returns.
