Getting into the numbers on multifamily apartment due diligence for LP

The Numbers That Made Me Walk From a 300-Unit Deal

How LPs Can Do Smarter Due Diligence in Multifamily Syndications

When I was just getting started in real estate, I thought “due diligence” meant reading the offering memorandum and trusting the IRR projections.

But over time—and through 70+ syndications—I’ve learned that real due diligence starts where the pitch deck ends.

Let me walk you through one of the clearest examples: a 300-unit deal that looked perfect on paper. Class B asset, decent submarket, rents appeared low. But as soon as I opened the underwriting model, the numbers told a different story.

The First Red Flag: Exit Cap Rate Assumptions

The sponsor was assuming they’d sell the asset in five years at the same cap rate they were buying it at. That may sound reasonable, but it’s not conservative.

Markets change. Interest rates rise. In today’s environment, assuming a weaker exit market is just common sense. I always look for at least a +0.5% buffer on the reversion cap rate.

When I adjusted that one cell in the spreadsheet, the projected IRR dropped by 2 full percentage points.

Rent Growth and the Reality of the Submarket

Next, I looked at their rent growth assumption: 2.5% annually. That doesn’t sound crazy — until you realize the submarket was facing a wave of new supply.

We pulled CoStar reports, talked to local property managers, and saw rent growth was closer to 1% (if that). Once again, a small tweak to the assumptions made a big difference.

Expenses: The Silent Killer

One of the most common mistakes I see is operators lowballing operating expenses.

In this deal, they were modeling expenses at around $3,200/unit/year. But on a stabilized Class B asset, I expect to see at least $4,000–$5,000 per unit. That covers property management, repairs, insurance (which has gone way up), taxes, and more.

After adjusting just those three assumptions — exit cap, rent growth, and expenses — the IRR dropped below our investment threshold.

We passed on the deal.

Takeaways for LPs Doing Due Diligence

You don’t have to be a spreadsheet wizard to vet a deal. But you should be asking:

• What’s the reversion cap rate, and how does it compare to today’s market?

• What annual rent growth is assumed — and is it realistic for that submarket?

• Are the expense assumptions in line with industry norms?

These are the same questions family offices and institutional capital ask before committing capital. You should, too.

The big mistake I see LPs make? Comparing deals by return metrics alone.

Two deals can show a 17% IRR — but one is built on fantasy inputs. That’s the danger of comparing deals by their glossy slide decks.