Underwriting 2–4 Units In Ann Arbor: Investor Playbook

What if you could look at any duplex, triplex, or fourplex in Ann Arbor and know within minutes if it belongs in your portfolio? You want a simple, repeatable way to underwrite small multifamily so you can act fast and with confidence. In this guide, you’ll get a practical playbook tailored to Ann Arbor and Washtenaw County that walks you from rent comps to DSCR, plus the inspections and financing choices that move the needle. Let’s dive in.

Why 2–4 units in Ann Arbor

Ann Arbor’s rental demand is anchored by the University of Michigan and Michigan Medicine. That mix brings steady interest from students, faculty, researchers, and medical staff. Near-campus areas skew seasonal with August move-ins, while hospital-adjacent corridors see more year-round leases and lower turnover. Zoning and neighborhood character limit new supply in many areas, which helps stabilize occupancy and values over time.

The practical takeaway for underwriting is simple. Student-heavy micro-markets usually have higher turnover and seasonality. Hospital and employment-center corridors tend to show more stable occupancy. Model both scenarios so you know how the asset performs across the calendar.

Set your buy box

Define the box before you shop deals. That speeds decisions and keeps you objective.

• Locations: near university corridors, hospital-adjacent neighborhoods, or stable residential pockets in Washtenaw County.
• Property type: 2–4 units, legal conforming use, verify permits on conversions.
• Condition: light-turn to value-add, depending on your rehab capacity and timeline.
• Targets: minimum cap rate at stabilization, DSCR threshold, and cash-on-cash goal.

Document your thresholds. They will guide fast yes or no calls when a listing hits.

Pull rent comps the right way

Price each unit type on its own. Start with the unit mix and size, then gather comps.

• Sources: MLS active and recently leased listings, local property managers, on-campus housing boards for student-oriented units, and reputable rent aggregators.
• Adjustments: bedroom and bath count, square footage, condition, included utilities, off-street parking, furnished status, lease length and timing.
• Output: a market rent range by unit type and an estimate for leasing velocity.

Lock in a conservative rent within the range for underwriting. Use the higher figures only for sensitivity tests.

Model vacancy and EGI

Use both physical vacancy and economic vacancy to reflect real-world loss.

• Baseline scenarios: run 3 percent, 7 percent, and 12 percent to capture strong, typical, and softer conditions.
• Student areas: expect seasonal turnover and possible summer gaps.
• Hospital-adjacent: generally longer lease terms and lower churn.

Compute Effective Gross Income. EGI equals potential gross rent minus vacancy and concessions, plus other income. Other income can include parking, laundry, pet fees, or storage. Verify local rules before modeling any furnished or short-term premiums, since some neighborhoods restrict short-term rentals.

Build expenses and reserves

Small multifamily often runs a higher operating expense ratio than large buildings. A practical range is about 35 percent to 50 percent of EGI, with lower ratios for renovated and professionally managed properties and higher for older, owner-managed buildings.

Include line items for:

• Property taxes, checked against Washtenaw County records
• Insurance, with attention to student-tenanted risk profiles
• Owner-paid utilities like water, sewer, and trash if applicable
• Repairs and maintenance, plus a turnover allowance
• Management fees, whether self-managed or third-party
• Legal, advertising, accounting, landscaping, and routine supplies

Set replacement reserves. A common approach is 300 to 1,000 dollars per unit per year, or 3 to 5 percent of EGI. Older buildings push to the higher end.

Calculate NOI, cap rate, and DSCR

Work from the ground up.

• Net Operating Income: EGI minus operating expenses.
• Cap rate: NOI divided by purchase price. Use it for a quick value check.
• Local guidance: stabilized small multifamily in core locations near the university or hospital may trade around 4 to 6 percent cap rates. Properties that need significant work may underwrite closer to 6 to 8 percent or more.
• DSCR: NOI divided by annual debt service. For investor loans, many lenders look for at least 1.20 to 1.35. Build your own minimum and stress-test it.

Run sensitivities. Adjust rents, vacancy, and interest rates to see where DSCR or cash flow breaks.

Pick financing for your plan

Match the loan to your strategy and occupancy intent.

• Owner-occupied options:
  • FHA 1 to 4 unit loans with low down payments, often as low as 3.5 percent for qualified borrowers. FHA 203(k) can bundle renovation for eligible properties.
  • Conventional owner-occupied 2 to 4 unit products that may allow lower down payments than investor loans, with rental income considered under specific guidelines.
  • VA loans for eligible veterans may finance up to 4 units with owner occupancy and favorable terms.
• Investor options:
  • Conventional investment loans often require 20 to 25 percent or more down, with higher rates and DSCR tests.
  • Portfolio and community banks can offer flexible terms based on local knowledge.
  • DSCR-focused, bank statement, or bridge and hard-money loans may fit value-add timelines, at higher cost.

Plan for 25 percent or more equity for many investor loans and underwrite on 25 to 30 year amortizations where applicable. Always model a worst-case financing scenario with a higher rate and lower loan-to-value to keep risk in check.

Inspect what affects returns

A disciplined inspection plan protects your pro forma.

• Structure and envelope: roof age, foundation, drainage, exterior walls, and windows.
• Mechanical systems: per-unit or central heating, ventilation, water heaters, and electrical capacity. Watch for older panels and knob-and-tube wiring in vintage housing.
• Plumbing: material types and sewer line condition. A sewer scope is smart for older properties.
• Life safety: egress, smoke and CO detectors, and proper fire separation where required.
• Interiors: kitchens and baths, appliance condition, and any signs of water intrusion.
• Hazards: lead-based paint in pre-1978 homes and possible asbestos in older materials.
• Site: parking, porches and balconies, retaining walls, and accessory structures.
• Compliance: confirm legal unit count, permitted conversions, and any open violations or permits.

Document every finding with photos and quotes. Roll the results into your CapEx budget and reserves.

Plan rehab and CapEx

Build three scopes before you submit offers. That way you know your strike price and your upside.

• Light turn: paint, floors, minor repairs, and appliance swaps. Budget several thousand per unit.
• Mid-level: kitchens and baths, HVAC service or partial replacement, and windows. Budget about 10,000 to 30,000 dollars or more per unit based on scope.
• Heavy rehab: structure, full system replacements, roof, and layout changes. Budget 30,000 to 100,000 dollars or more per unit.

Factor permit timelines for plumbing, electrical, and mechanical work. If you plan unit conversions or additions, expect a longer path for zoning and occupancy approvals.

Source deals that fit

Cast a focused net and track leads.

• MLS for active and sold data
• Local brokers who specialize in small multifamily and student housing
• Off-market channels like landlord networks, campus bulletin boards, and property manager turnover lists
• Washtenaw County assessor records for ownership, tax history, and multi-unit identification
• Occasional auctions or bank-owned opportunities

Keep a living database of addresses, owner contacts, last sale dates, list-to-close gaps, and rent assumptions. This becomes your private pipeline.

Due diligence workflow

Use a repeatable checklist to protect timelines and capital.

1. Initial screen: unit mix, quick rent potential, GRM, and cap rate sanity check.
2. Income validation: current rent roll, leases, and deposits. Pull comps and adjust for unit type, condition, and utilities.
3. Expense validation: seller financials for two to three years if available, benchmarked against a 35 to 50 percent expense ratio. Get tax and insurance quotes.
4. Capital needs: professional inspection and contractor estimates. Set immediate CapEx and ongoing reserves.
5. Financing: obtain a term sheet and model DSCR, LTV, rate, and amortization sensitivities.
6. Returns: compute NOI, cap rate at purchase, cash-on-cash, and IRR if needed. Run rent growth scenarios and vacancy shocks.
7. Legal and regulatory: verify legal unit count, rental registration, zoning allowances, and any open violations.
8. Contract contingencies: inspection, financing, clear title, and, if applicable, certificate of occupancy.

Put it together with a simple model

Build a one-page sheet that you can update in minutes.

• Inputs: unit types and market rents, vacancy scenario, other income, and expense line items or a conservative ratio.
• Outputs: EGI, NOI, cap rate at ask and at your target price, DSCR under base and stress rates, and cash-on-cash by down payment.
• Decision rules: yes if DSCR meets your floor, cap rate clears your hurdle after stabilized CapEx, and cash-on-cash meets goal under base and stress cases.

When you use the same structure on every property, your offers sharpen, your timelines compress, and your hit rate improves.

Local nuances to remember

• Seasonality matters. In student-heavy pockets, lease expirations cluster around August and can elevate downtime. Model that timing.
• Hospital demand stabilizes. Corridors serving medical staff often support longer lease terms and steadier occupancy.
• Zoning and registrations. Confirm legal unit count, rental registration requirements, and short-term rental rules before you underwrite any furnished or flexible-term premiums.

Next steps

• Define your buy box and return thresholds in writing.
• Build your one-page underwriting model with base and stress cases.
• Start a comp file by unit type near the university and hospital corridors.
• Line up financing paths for owner-occupied and investor scenarios.
• Schedule inspections and contractor partners who can quote quickly.

If you want a second set of eyes on a live deal or help building your pipeline across the Detroit–Ann Arbor corridor, connect with Anthony Maisano to pressure-test your underwriting and source opportunities.

FAQs

What DSCR should I target for a 2–4 unit in Ann Arbor?

• Many lenders look for at least 1.20 to 1.35, and it is wise to set your own floor within that range and stress-test higher rates and vacancy.

How should I model vacancy for student-oriented rentals?

• Run multiple scenarios, such as 3 percent, 7 percent, and 12 percent, and expect more seasonal turnover and potential summer downtime near the university.

What is a reasonable expense ratio for small multifamily?

• A practical range is about 35 to 50 percent of EGI, leaning lower for renovated and professionally managed assets and higher for older properties.

What financing works for house hacking a duplex?

• Owner-occupied options include FHA with down payments as low as 3.5 percent for qualified borrowers, conventional owner-occupied loans, and VA for eligible veterans.

Which inspections are most critical for older Ann Arbor buildings?

• Focus on roof and foundation, electrical capacity and wiring type, plumbing and sewer line scope, heating systems, and life-safety elements like egress and detectors.

How do I verify legal units and rental registration?

• Confirm the legal unit count, permitted conversions, and rental registration status with local planning and building departments, and check for any open violations or permits.