This post was inspired by the frequent comments we’ve received from our passive investors. Joe Stampone’s excellent blog provided the inspiration to dig deeper into a topic that is near and dear to our heart.

Even till a few years ago, passive investing in private real estate deals was only accessible through closed “country club” networks and word-of-mouth referrals. Investors trusted the Sponsor because they had a social or professional connection.

These deals have become popular due to the high returns. As they become more accessible and investors become more sophisticated, operators are forced to become more transparent. This means that they must carefully vet sponsors, conduct due diligence and educate themselves about the opportunities.

Investors must ask the right questions to determine if an opportunity is a good fit for their portfolio. For e.g., a deep value-add opportunity with uncertain income returns will not be a good fit for an investor with immediate liquidity needs.

Each market, asset class and strategy is unique. We are focused on value-add multifamily deals. This post assumes that the screening checklist is for a garden-style property built in the 1980s located in a secondary sub-market.

See below for our deal screening checklist for passive multifamily investor divided into sections.


We’ve talked about this topic extensively and covered it in an earlier post. Often time, this will be the most critical factor.

  • What is the 3-5 year historical and projected growth across population, income and wage growth?
  • How well is the employment base diversified?
    • We prefer that no sector be more than 18-20% of the total employment and the employment base should be sufficiently diversified across employers.
    • City council, Wikipedia and market sources can provide a quick overview for the initial analysis.
  • Do the median income levels support the underwritten rents?
    • As a rule of thumb, we assume tenants need to make 2.5x-4.0x annual rent to qualify.
  • What is the market vacancy?
    • This is influenced by supply-demand factors and the availability of suitable comps. It is best to look at 3-4 post-renovation comps within the sub-market.
  • What are the demographics?
    • This ties in with the first point around income, wage growth and the type of tenants you want to cater to.
    • We know an extremely successful multifamily syndicator who exclusively focuses on the Hispanic community. They have a proven strategy backed by an extensive track record.
  • How is the school district – elementary, middle and high school?
    • In our experience, tenants that pay attention to factor like school districts are better quality tenants.
  • How is the access (local and regional) to transportation – air, train and road networks – and amenities – hospitals, shopping malls, recreation centers?
  • What, if any, crime issues does one need to be aware of?

Strategy / Business Model

  • Does the strategy work in this sub-market?
    • A Sponsor specializing in turning around Class C properties is going to have a tougher time in a rich zip codes like Highland Park (Dallas) or River Oaks (Houston). Matching the strategy to the sub-market is key!
  • What is the target hold period?
    • In more affluent sub-markets, the investment strategy could be long-term (10+ year) buy-and-hold whereas a typical Class B/C value-add multifamily strategy is usually between 3-5 years.
  • What is the spread to the higher quality, Class A/B deals, in the sub-market?
    • A narrow spread indicates a tight market or a bad purchase with little margin of safety. No deal is better than a bad deal!
  • Is there a comparable property – post-renovation – in the market?
    • This helps in proving that the proposed strategy and business model is applicable in real life.
  • What are the post-renovation rents based on?
  • What is the breakdown of the capex budget?
    • Is the capex budget based on bids from subcontractors or an estimate?
    • How large is the contingency? We assume 10-20% of the total budget.
  • How long does it take for renovations to be competed and the property to stabilize?


  • What is the seller’s motivation?
    • We’re assessing if the story makes sense. Often times, long-time owners want to get out of the business because they are either burnt-out, jaded, want to cash out or want to move into bigger properties.
    • Assessing the seller’s motives helps us piecing more of the puzzle together.
  • Is the property being purchased in-line with comparable sales or below replacement cost?
  • What is the purchase cap rate? How is the NOI calculated?
    • By design, value-add multifamily deals should have a lower purchase cap rate as they are not being run efficiently or have significant upside potential.
    • Some seller’s account for capex in repairs and maintenance. This artificially lowers the NOI (and cap rate). An underwrite should back out these charges to understand the true operating picture.

The Property

  • How is the property’s visibility?
    • The oft-repeated real estate mantra: location, location, location plays a big role. At the minimum, how many cars pass by, accessibility and foot traffic (if applicable) should be carefully assessed.
  • What is the capex history and are there any ongoing capex issues?
    • This is where the great Sponsors truly stand out with their due diligence.
  • What is the status of the structure and systems?
    • Foundation, windows, roofs, plumbing, siding, pipes, sewer, wiring, etc
  • What, if any, physical limitation can put a ceiling on rents?

P&L: Revenue / Expenses

  • Revenue
    • How does the Year 1 pro-forma compare with the TTM (trailing 12 months)?
      • Check assumptions – loss to lease, vacancy, concessions, employee units, model units, admin units, bad debt – for reasonability
    • What are the revenue growth rates over the holding period?
      • In major MSAs, long-term growth rates should hover between 2.0-3.5%.
    • What is the amount and growth rate applied to other revenue/income categories?
      • Does market data support these assumptions?
  • Expense
    • How does the Year 1 pro-forma compare with the TTM (trailing 12 months)?
      • Check assumptions for reasonability
    • What are the assumptions and how is property tax reassessment being calculated?
      • In non-disclosure states like Texas, owners do not have to declare the purchasing power. But tax assessors can be more aggressive in assessing taxes.
      • Buyers should typically assume that the property is reassessed between 80-95% of the purchase price. Typically, a 3rd party tax analysis is paid for.
    • What are the expense growth rates over the holding period?
      • How does this compare against the revenue growth rate?
    • What are the payroll and recurring replacement expenses used in underwriting?
      • Currently, our market is hot. Hence, payroll expenses have shot through the roof and have increased by 20-30% of underwritten estimates.
      • Recurring replacement expense average between $300-600 peer unit depending on the age and quality of the property.
    • What are the partnership related expenses?
      • These include asset management fees, travel expenses, accounting costs, technology expenses, etc.


Debt plays a critical role in financing real estate purchases. Hence, we wanted to call this out separately from the P&L section.

  • What are the debt assumptions?
    • Amortization period, loan term, interest-only (IO) years, LTV, min. DSCR to maintain, other debt covenants
  • Are the debt assumptions based on actual quotes?
  • Is the debt fixed or floating?
    • Has the rate been locked?
    • If floating, has an interest rate cap been purchased?
  • How does the debt structure align with the strategy / business model?
  • What are the refinance assumptions?
    • We typically do not assume refinance. It is nice to refinance out of a loan but we feel that it is the cherry on top of the cake.
    • Nobody has a crystal ball. Sponsors who are aggressive in underwriting refinance assumptions are flirting with disaster.

Sale Assumptions

  • What is the exit cap rate?
    • To be conservative, the exit cap rate should be higher than entry cap rate. We assume the exit cap rate to be 50-200 bps higher than purchase cap rate. This is dependent on the market, macroeconomic analysis and the quality of the property being acquired.
  • What are the selling costs?

Return Analysis

  • How is the projected IRR split between cash flow and refinance/sale?
    • The higher IRR attributable to refinance/sale, the riskier the project.
  • What is the stabilized cash-on-cash (COC)?
    • How does this trend?
  • What is the stabilized return on cost (ROC)?
    • How does this trend?
    • The stabilized ROC should include a 150-200 bps premium to going in cap rates, depending on the risk profile. This higher the premium, the more the margin of safety.
  • Inquire about sensitivity analysis especially around holding period, purchase price and exit cap against project IRR (project and LP), equity multiple (project and LP) and COC.

The above should be the starting point of the due diligence process. Passive investments area great way to build wealth and add negatively correlated assets to your public markets portfolio. But by their nature, passive investments can pose certain hidden risks that are not easily discovered.

Always remember, no deal is better than a bad deal!