Learning to underwrite: my first attempt on a Kamloops duplex

The listing said: duplex, Sahali, $689,000, cap rate approximately 5.2%. That last number is what got my attention.

I pulled the full listing. Two suites — a 3-bed upper unit renting at $1,850/month and a 1-bed lower at $1,200/month. Gross annual income: $36,600. On a $689,000 purchase, a 5.2% cap would imply NOI of about $35,800. The math checked out at the surface level.

Then I ran an actual underwrite.

What the listing didn't say

First problem: vacancy. The listing assumed 100% occupancy to calculate cap rate. Real underwriting uses a vacancy/credit loss allowance — typically 5–8% for the BC Interior. At 5%, my effective gross income drops from $36,600 to $34,770.

Second problem: operating expenses. I estimated: property tax (~$4,200/year), insurance ($1,800), property management ($2,800), maintenance reserve ($1,800), utilities on common areas ($400). Total: $11,000.

NOI after real expense modeling: $34,770 − $11,000 = $23,770.

Real cap rate: $23,770 / $689,000 = 3.45%. Not 5.2%.

The third problem

At current rates (5.9% on a 25-year am), a $551,200 mortgage (80% LTV) carries monthly payments of ~$3,510 — $42,120/year.

My NOI was $23,770. Annual debt service was $42,120. Debt service coverage ratio: 0.56. You need at least 1.2 to qualify for most investment mortgages, and anything under 1.0 means the property is cash-flow negative.

What I learned

Always build your own expense model from first principles. Never trust a listing's cap rate — it's marketing, not underwriting. The deal might work at a lower price. At $490,000 with the same rents, you get to roughly break-even. That's the conversation to have.