Commercial real estate underwriting: a buyer's reference
Speeding up first-pass underwriting: the Reddit question, answered
Screening is not underwriting. What a first pass needs, and what it does not.
A first pass is a screen, not an underwrite. Its job is to tell you whether a deal clears your return and financing thresholds at plausible assumptions, so you can say no quickly and spend real hours only on survivors. It needs four numbers: stabilized net operating income, a cap rate, a loan sized by whichever constraint binds first, and year-one cash-on-cash. Lease rollover, waterfalls and IRR belong to the second pass.
Why the word Reddit is in the title
People append reddit to a search like this because they want an answer from somebody with nothing to sell. Reasonable instinct, so here is the position stated plainly.
- Altyst publishes this page, and we sell commercial real estate underwriting software. We do have something to sell.
- We did not read Reddit. We quote no post, no user and no thread, and we characterise none.
- Every claim here about a company other than us comes from a page we fetched, linked in the sources.
- The straight answer follows anyway, and it works without buying anything from us.
What a first pass is for
A first pass produces a decision, not a model: dead, worth a real underwrite, or worth one call for the documents that would settle it. If your screen never kills anything, it is a slower version of your second pass. Precision that cannot change the decision is waste, and an assumption does not need to be defensible yet, only plausible and written down.
| Needed to decide now | Can wait for the second pass |
|---|---|
| Unit count and mix, or area and tenant count | Line-by-line T-12 normalisation |
| The ask, per unit or per square foot | Rollover with tenant improvements and leasing commissions |
| Market rent by unit type, not only in-place rent | Equity waterfall and promote |
| One operating expense total you will defend | IRR, and equity multiple (total distributions divided by equity invested) |
| Occupancy, and how tax is treated on a sale there | Exit cap grids, capital phasing, loan fees, closing costs |
| Your return threshold and your lender's minimums | Anything needing a hold period you have not chosen |
A five-step screen
This runs in a spreadsheet. If you would rather not build one, the free calculators at altyst.ai/tools do the net operating income, loan sizing, DSCR, debt yield and cash-on-cash arithmetic, no account needed.
1. Build the income line correctly
Gross potential rent is the total scheduled rent for every unit at market or asking rent, vacant units included. It is not unit count multiplied by average in-place rent, and it is not the sum of the in-place rent roll. Those are three different numbers, and substituting one for another bends everything downstream.
Subtract vacancy and credit loss, subtract concessions, add other income such as parking, laundry, reimbursements and fees. That is effective gross income.
2. Take one expense number, not a rebuilt statement
Do not reconstruct the trailing twelve. Take a single operating expense total and defend it two ways: against the seller's stated number, and against a per-unit or per-square-foot figure from an asset you already know.
One line deserves attention now. Where a jurisdiction reassesses on a change of ownership, the seller's property tax line has no bearing on yours, so re-strike it at your basis. Everything else stays at the seller's number until the deal survives.
3. Net operating income, and say what you did with reserves
NOI is effective gross income minus operating expenses. It excludes debt service, always. Replacement reserves are a choice: pick one treatment, label it, and make sure the cap rate you compare the NOI against was struck the same way. A lender may require a reserve whichever way you screen. Freddie Mac's conventional fixed-rate term sheet lists a replacement reserve deposit as generally required.
4. Size the loan three ways and take the smallest
- Loan to value:
LTV × value, where value is NOI over your cap rate, or the ask. - Debt service coverage: DSCR is NOI divided by annual debt service, so maximum debt service is
NOI / required DSCR. Divide by the mortgage constant at your rate and amortisation for the loan. - Debt yield: NOI divided by the loan amount, so the loan is
NOI / required debt yield. It ignores the interest rate, which is why lenders use it.
Which one binds depends on your rate, your cap rate and the lender's thresholds, and it moves as rates move, so no rule of thumb replaces the arithmetic. Agency term sheets are public if you want thresholds to check against. Freddie Mac's conventional fixed-rate multifamily sheet, dated 4/26, sets these:
| Term | Amortizing and partial interest-only | Full-term interest-only |
|---|---|---|
| 5-year and under 7-year | 1.25x minimum DCR, 75% maximum LTV | 1.25x, 65% |
| 7-year | 1.25x, 80% | 1.25x, 65% |
| Over 7-year | 1.25x, 80% | 1.25x, 70% |
5. Cash-on-cash, then one sentence
Equity is price, plus a rough allowance for closing costs and day-one capital, minus the loan. Year-one cash flow is NOI minus annual debt service, less any replacement reserve you left out of NOI in step 3, and cash-on-cash is that divided by equity. It is available before you decide anything about the exit, which is what makes it a good screen.
Finish with one line: this works if X. If X is "rents reach the market rent I believe in and taxes land where I struck them", underwrite it properly. If X is "we sell at a cap rate lower than the one we are buying at", you already have your answer and it is no.
Where the time goes, and what software removes
Re-keying is mechanical: pulling unit mix, in-place rents, lease expirations and expense totals out of a PDF offering memorandum, a rent roll export and a trailing twelve month statement, and typing them into cells. Its cost scales with document length, not with how hard the deal is. Software removes this, and it is a real saving.
Deciding is the real work: what rent you believe, what the tax line becomes, what you would pay. Nothing removes this, and a tool claiming otherwise has either hidden a default or invented one. So the test for a tool is not how fast it produces a number. It is whether you can see where every number came from and change it in one place. If the whole screen went on typing, you have not screened anything.
Two notes before you shop. Ask whether a tool opens and produces the file formats your counterparties send. And pricing is not always posted. Altus Group's ARGUS Enterprise page says pricing for the ARGUS Intelligence Platform is "flexible, tiered and scales with your business" and asks prospects to contact the company, and it states that every tiered, asset-based subscription to that platform includes ARGUS Enterprise alongside ARGUS Asset Manager, ARGUS Portfolio Manager and ARGUS Assist. We did not find a posted price there, so budget for a conversation rather than a checkout page.
Where Altyst fits, as a disclosure
Altyst ingests an offering memorandum, rent roll, T-12, lease or a pasted listing link, extracts the figures and builds an editable model covering rollover with tenant improvements and leasing commissions, debt sizing, waterfall, DCF, IRR, equity multiple, DSCR, cash-on-cash, exits and sensitivity tables. The AI does extraction only. The arithmetic runs on a deterministic engine, so the same inputs give the same numbers and every figure traces to a source document or an assumption you can edit. Exports are Excel, PDF and PowerPoint.
Pricing is $12 a month for 5 deals, $24 for 15, and $99 for a 5-seat team at 75. No free tier, no free trial. It does not do property management, lease administration, CRM, brokerage listings or debt origination, and it cannot open or produce ARGUS files. If none of that suits you, the screen above runs on the free calculators at altyst.ai/tools, the free ten-year multifamily model at altyst.ai/tools/multifamily-model, or your own spreadsheet. Definitions are at altyst.ai/glossary.
Questions this raises
Should a first pass include an IRR?
Usually not. An IRR needs a hold period, an exit cap rate and a year-by-year cash flow, so it makes you decide three things you have no basis for yet. Equity multiple, total distributions divided by equity invested, depends on the same choices. Compute both once the deal survives.
How do I estimate operating expenses without a T-12?
Use a per-unit or per-square-foot total from an asset you already know, then re-strike property taxes at your purchase basis if the jurisdiction reassesses on sale. Label the line as an assumption, not a fact.
Which loan-sizing constraint should I check first?
All three, because each is one division. Loan to value, debt service coverage and debt yield each imply a loan amount, and the smallest is your loan. DSCR is NOI divided by annual debt service, and debt yield is NOI divided by the loan amount. Which one binds shifts as rates and cap rates move.
Can I use the broker's pro forma as a starting point?
As a record of what the seller wants you to believe, yes. Take the facts that are hard to get elsewhere, such as unit mix, lease expirations and the rent roll itself, and replace every forward assumption with your own.
Do I need software to screen faster?
For the screen itself, no. A spreadsheet or a handful of free calculators is enough. Software earns its place when you are re-keying long documents repeatedly and want each figure traced to where it came from.
Sources
- Altus Group, ARGUS Enterprise product page. https://www.altusgroup.com/argus/argus-enterprise/
- Freddie Mac Multifamily, conventional product index. https://mf.freddiemac.com/product/conventional
- Freddie Mac Multifamily, Conventional: Fixed-Rate Loans term sheet, dated 4/26. https://mf.freddiemac.com/docs/product/fixed_rate.pdf
All three fetched 16 September 2026. Facts about Altyst come from Altyst. No figure here is attributed to a source we did not open.