How Do I Read a Multifamily Rent Roll? (Spot Red Flags Before You Buy)

How Do I Read a Multifamily Rent Roll? (Spot Red Flags Before You Buy)

Master rent roll analysis to detect below-market rents, qualified tenants, payment problems, and seller fraud in LA County
By Justin Borges, DRE #01940318 | Updated March 2026
🚨 7 Critical Red Flags to Spot:
Look for: (1) Long-term tenants paying $500+ below market in RSO areas = $100K+ relocation costs, (2) Recent 30-50% rent increases before listing = fraud, (3) Vacant units counted as income, (4) Perfect payment history that's "too good to be true", (5) All tenants month-to-month with no leases = management chaos, (6) Security deposits not matching rent amounts, (7) Payment patterns showing consistent late/partial payments. AB 1482 markets: below-market rents = opportunity. RSO markets: below-market rents = expensive trap requiring $10,650-$26,550 per tenant to remove.
$50K+
Cost Difference: AB 1482 vs RSO
$26,550
RSO Qualified Tenant Fee (3+ years)
6+
Fraud Patterns to Detect
12 Months
Payment History Required

The rent roll is the single most important document in multifamily investing—it reveals whether you're buying an income-producing asset or an expensive problem disguised as opportunity. After reviewing hundreds of rent rolls across 13+ years in LA County real estate, I've learned that most investors make critical errors.

They trust seller-provided summaries without verifying actual leases, miss the difference between AB 1482 markets (where long-term below-market tenants naturally turn over in 3-5 years at zero cost) and RSO markets (where those same tenants require $10,650-$26,550 each in relocation fees to remove), and fail to spot payment history red flags that indicate poor management or problem tenants.

This guide teaches you to read rent rolls line-by-line to identify: (1) below-market rents that represent genuine opportunity vs expensive traps, (2) qualified tenant status in RSO markets that can cost $100K+ to resolve, (3) payment problems indicating tenant quality issues, (4) fraud patterns where sellers inflate rents or fabricate tenants to manipulate property value.

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The Cap Rate Formula

Core Formula
Cap Rate = (NOI ÷ Purchase Price) × 100
Net Operating Income (NOI)
Gross Rental Income - Operating Expenses
Gross Rental Income
(Monthly Rent × 12) - Vacancy Loss (3-5%)
Operating Expenses
30-40% of Gross Income (LA County)

Real Example: Alhambra Fourplex

$1.8M Purchase Price Analysis
Gross Rental Income
$96,000
Vacancy Loss (5%)
-$4,800
Effective Gross Income
$91,200
Operating Expenses (35%)
-$31,920
Property Taxes (1.1%)
-$19,800
Net Operating Income
$39,480
Cap Rate at $1.8M
2.19%
⚠️ Critical: Property Tax Reset

Seller's tax bill might show $12,000 (based on old assessed value). YOUR taxes will be $19,800 at $1.8M purchase price. This $7,800 difference destroys cash flow if ignored. Always calculate taxes at 1.0-1.25% of YOUR purchase price, not seller's current bill.

LA County Cap Rate Ranges by Market Tier

Cap rates vary dramatically by location, reflecting appreciation potential, tenant quality, and rent control risk.

Premium Areas
3.8-4.5% Cap Rate
South Pasadena, Arcadia, Manhattan Beach
8-10/10 rated schools
High-income demographics
Strong appreciation (4-6% annually)
Low crime, excellent amenities
Appreciation focus over cash flow
Long-term holds (10+ years)
Balanced Markets
4.3-5.2% Cap Rate
Alhambra, Monterey Park, Torrance
6-8/10 rated schools
Middle to upper-middle income
Moderate appreciation (3-4% annually)
AB 1482 only (investor-friendly)
Balanced cash flow + appreciation
Best risk-adjusted returns
Value Markets
5.0-6.5% Cap Rate
El Monte, Gardena, Hawthorne
5-7/10 rated schools
Working to middle-class
Slower appreciation (2-3% annually)
AB 1482 in most areas
Cash flow focus
Positive cash flow year 1

Current vs Stabilized Cap Rates

This distinction is CRITICAL in AB 1482 markets with below-market rents.

Year-by-Year Progression: Alhambra Fourplex

Starting rents $200/unit below market in AB 1482 market:

Year Gross Income NOI Cap Rate Notes
Year 0 $86,400 $23,400 1.3% Purchase with below-market rents
Year 1 $93,300 $28,300 1.6% 8% rent increases applied
Year 2 $98,800 $32,800 1.8% 2 units turn to market
Year 3 $103,200 $35,200 2.0% 1 more unit to market
Year 4 $106,000 $38,000 2.1% All units at market
Year 5 $110,000 $42,000 2.3% Market rents grew
✅ Value Creation Through Stabilization

This property's NOI increased from $23,400 to $42,000 over 5 years—a $18,600 increase. At a 4.5% exit cap rate, that's $413,333 in added value from rent stabilization alone, before any market appreciation.

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AB 1482 vs RSO: $250K+ Valuation Difference

Same property, same rents, completely different cap rate analysis based on rent control type.

AB 1482 Markets
Alhambra, Pasadena, Torrance
  • Current cap rate: 1.22% (below-market rents)
  • Stabilized cap rate: 1.83% (Year 4-5)
  • Rents reach market via natural turnover
  • Relocation costs: $0
  • Timeline to stabilization: 3-5 years
  • Fair value at $1,600,000
RSO Markets
LA City, Santa Monica, West Hollywood
  • Current cap rate: 1.22% (same as AB 1482)
  • Cannot calculate stabilized cap rate
  • Market rents require expensive buyouts
  • Relocation costs: $42,600-$106,200 (4 units)
  • Timeline: 8-15 years minimum
  • Fair value at $1,350,000 (if willing to hold)
🚨 $250K+ Difference

Identical property with same current income trades $250K higher in AB 1482 markets vs RSO markets due to stabilization potential. This is why understanding rent control jurisdiction is critical BEFORE calculating cap rates.

Browse AB 1482 Markets with $250K+ Valuation Advantage

See properties in markets where stabilization creates value through natural turnover

7 Common Cap Rate Calculation Errors

1
Using Seller's Pro Forma Income
Use actual trailing 12-month rent collections verified against bank deposits. Sellers inflate projected income by 10-25%. If current rents are below market, calculate BOTH current and stabilized cap rates separately.
2
Forgetting Property Tax Reset
Property taxes reset to purchase price per Prop 13. Seller paying $12K on old $1M assessment? You'll pay $22K at $2M purchase (1.1% typical). This $10K annual difference destroys cash flow projections.
3
Underestimating Operating Expenses
Budget 35-40% for LA County (not 25%). Include property taxes, insurance (up 50% recently), maintenance, management, CapEx reserves, utilities, landscaping. Use actual verified expenses, not seller's "managed in-house" savings.
4
Including Mortgage Payments in NOI
Cap rate is unleveraged return (debt-free). NEVER include mortgage payments in NOI calculation. For leveraged returns, use cash-on-cash return instead: Annual Cash Flow After Debt ÷ Total Cash Invested.
5
Not Accounting for Vacancy
Budget 5% vacancy minimum even if currently 100% occupied. Higher turnover areas need 7-10%. Vacancy loss compounds: No rent collected + turnover costs + lost rent during renovation.
6
Confusing Cap Rate with Cash-on-Cash Return
Cap rate = Property performance (unleveraged). Cash-on-cash = Your return on invested capital (leveraged). A 4% cap property might deliver 8% cash-on-cash with financing. Don't confuse the two metrics.
7
Ignoring Rent Control Impact
RSO below-market rents require expensive buyouts ($10,650-$26,550 per qualified tenant). AB 1482 below-market rents correct via natural turnover. Same $80K current NOI has different stabilization paths and values.
Avoid These Costly Mistakes
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Reverse Engineering Fair Value

Once you know how to calculate cap rate, you can reverse the formula to determine what a property SHOULD sell for:

Fair Value Formula
Fair Value = NOI ÷ Target Cap Rate

Example: Overpriced Property

Seller Asking $2.2M
Verified NOI
$85,000
Market Cap Rate (Alhambra)
4.7%
Fair Value Calculation
$85,000 ÷ 0.047 = $1,808,511
Seller's Ask
$2,200,000
Overpriced By
$391,489
✅ Maximum Offer Price Strategy

Determine your target cap rate for the market tier → Calculate fair value using verified NOI → Deduct repair costs → Deduct value for deferred maintenance → Result is your maximum offer price. Don't let emotions or "winning the deal" push you above this number.

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Ready to Calculate Cap Rates on Real LA County Properties?

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Practice Your Cap Rate Formula on Live LA County Properties

Apply what you learned: Calculate NOI, determine fair value, analyze current vs stabilized cap rates

PREMIUM TIER (3.8-4.5%)
South Pasadena Arcadia
BALANCED MARKETS (4.3-5.2%)
Alhambra Monterey Park Torrance
VALUE MARKETS (5.0-6.5%)
El Monte Gardena Monrovia

Frequently Asked Questions

Q
What is a cap rate and why does it matter?
Cap rate (capitalization rate) is the annual return on a real estate investment based on the property's Net Operating Income (NOI). Formula: Cap Rate = (NOI ÷ Purchase Price) × 100. It matters because cap rates allow you to compare multifamily properties objectively regardless of price, determine fair market value (Value = NOI ÷ Cap Rate), and assess whether a property delivers adequate returns for the risk level.
Q
How do I calculate Net Operating Income (NOI)?
NOI = Gross Rental Income - Operating Expenses. Gross rental income is actual trailing 12-month rent collections minus vacancy loss. Operating expenses include property taxes, insurance, maintenance, property management, utilities if owner-paid, and CapEx reserves. Do NOT include mortgage payments in NOI calculation. For LA County, budget 30-40% of gross income for operating expenses. Always use actual expenses, not seller pro forma.
Q
What's the difference between current cap rate and stabilized cap rate?
Current cap rate uses actual today's income with below-market rents. Stabilized cap rate projects income after rents reach market level (typically 3-5 years in AB 1482 markets). In AB 1482 markets, underwriting to stabilized cap rate is valid. In RSO markets, below-market rents may never stabilize without expensive buyouts. The difference can represent $200K-$400K in value creation opportunity.
Q
What is a good cap rate for LA County multifamily?
Premium areas (South Pasadena, Arcadia): 3.8-4.5% cap rates favor appreciation over cash flow. Balanced markets (Alhambra, Monterey Park, Torrance): 4.3-5.2% offer moderate cash flow plus appreciation. Value markets (El Monte, Gardena, Monrovia): 5.0-6.5% prioritize immediate cash flow. AB 1482 markets typically trade 0.5-1% higher than comparable RSO properties due to better rent growth potential.
Q
Should I include mortgage payment when calculating cap rate?
No, never include mortgage payments in cap rate calculation. Cap rate measures the property's performance independent of financing. It's calculated on unleveraged (debt-free) returns using only Net Operating Income. For leveraged returns accounting for financing, use cash-on-cash return instead: Annual Cash Flow After Debt Service ÷ Total Cash Invested. Cap rate and cash-on-cash return measure different things and shouldn't be confused.

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About the Author

Justin Borges (DRE #01940318) specializes in helping multifamily investors avoid overpaying through accurate cap rate analysis and AB 1482 vs RSO market selection. With 13+ years of experience analyzing LA County properties, Justin has developed systematic cap rate calculation processes that account for property tax resets, actual operating expense ratios, and rent control impact on stabilization timelines.

California Real Estate Broker | DRE #01940318