6 Metrics to Help Assess the Riskiness of a Multifamily Syndication

The cash flow metrics of multifamily syndications are usually the ones that get the most attention from passive investors. In my first syndication investments, I rarely looked at any of the other numbers as long as I knew, liked, and trusted the sponsor and vetted the location of the asset. In the Left Field Investor’s Deal Analyzer worksheet, which is available to our Infield members, there is a section called Primary Metrics to input the internal rate of return (IRR), average annualized return (AAR), cash-on-cash returns (CoC), and equity multiple. Most real estate investors understand that these terms deal with the financial returns that will hopefully be generated from a given investment. The purpose of the Deal Analyzer’s Secondary Metrics is to help investors assess the riskiness of a multifamily deal.

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”  – Warren Buffett

When reading through the private placement memorandum (PPM) and the executive summary of a syndication, it is easy to stop your evaluation after you have approved of the CoC and equity multiple. I urge you to continue your due diligence of the pro forma numbers to determine the risk of the investment by looking at these secondary metrics. This should be of paramount importance and will give you more peace of mind when you wire that large sum of money to the sponsor.

1) Exit cap rate and its relation to the entry cap rate

The capitalization rate, or cap rate, is the rate of return on an investment property that is based on an all-cash (no mortgage) purchase of that property. It is calculated by taking the net operating income (NOI) and dividing it by the value of the asset.

Entry, or going-in, cap rate is the cap rate at the time of purchase and should be consistent with those of nearby comparable properties. Exit cap rate, also called terminal or reversion cap rate, is used to estimate the property’s value at sale. As you can imagine, predicting cap rates 5, 7, or 10 years into the future may be difficult. Most experienced passive apartment investors will advise you to make sure that the exit cap rate is at least 0.5% higher than the entry cap rate to help ensure that the underwriting is conservative. I personally like to see the difference closer to 1%. Some sponsors will display a range of exit cap rates in a table to show you the differences in the investor returns. If the sponsor can show that the apartment will give you a good total return despite illustrating worse conditions at the time of the sale (i.e. higher exit cap rate), then you should have more confidence in their pro forma numbers.

Here is an example of how changing the exit cap rates can supersize the sale profits.

Purchase price: $12,000,000

NOI: $600,000

Entry Cap Rate: 5.0% ($600,000 / $12,000,000)

Example 1

Exit Cap Rate: 6.0% (1% higher than at purchase)

Year 5 NOI: $900,000

Sale Price: $15,000,000 ($900,000 / 0.06)

Example 2

Exit Cap Rate: 5.0% (no change from time of purchase)

Year 5 NOI: $900,000

Sale Price: $18,000,000 ($900,000 / 0.05)

While it would be great to have the exit cap rate in example 2, a sponsor who shows you example 1 is being more conservative (and probably more realistic) with the underwriting. Comparing the entry and exit cap rates is one of the first things I do when looking at the executive summary.

2) Yield on cost minus the market cap rate (Development Spread)

 Yield on cost (YoC), or return on cost, is an often-overlooked metric that is a more complete version of the cap rate since it takes into account the stabilized, pro forma NOI, which may not occur until years 2, 3, or 4, and the total project costs. Therefore, YoC is the stabilized NOI divided by the sum of the purchase price, capital expenditures, and closing costs and fees.

The difference between the YoC and the market cap rate is known as the development spread. If the YoC is 6.5% and the cap rate is 4.5%, then the development spread is 2%. For value-add multifamily assets and development projects, you should be looking for development spreads of at least 1.5% to 2.5%. Since this metric shows how much value can be added to a project, higher spreads are more desirable.

Brian Burke’s excellent book, The Hands-Of Investor, goes into more detail about this concept and a related, but more comprehensive, metric called development lift.

3) Break-even Occupancy

The break-even occupancy is the economic (not physical) occupancy rate at which all operating expenses and debt service is covered. Thus, the resulting cash flow would be zero. Lenders prefer to see a break-even occupancy of 85% or less. For multifamily assets, our LFI Deal Analyzer suggests a break-even occupancy of 80% or less. I have seen multiple deals with a published break-even occupancy of under 70%. Assuming the underwriting is accurate, a low break-even occupancy percentage should give you confidence that the asset could survive a high vacancy rate due to unforeseen circumstances. Remember that all real estate is affected by its location so you will want to make sure that the break-even occupancy of the prospective investment property is also comfortably lower than the average surrounding apartment occupancy rate.

4) Default Ratio

At first glance, the default ratio appears to be similar to break-even occupancy. It is calculated by adding the operating expenses and debt service and dividing that by the effective gross income. Essentially, it gives you the break-even income (not occupancy) needed to cover the expenses. In our Deal Analyzer, we suggest a default ratio of 85% or less.

5) Debt Service Coverage Ratio (DSCR)

DSCR is a measurement of the asset’s cash flow to pay the current debt obligation. Most banks are comfortable if the NOI divided by the total annual debt service is equal to or greater than 1.25. If a syndicator has put out the offering and has secured a loan, obviously the lender is comfortable with the amount they are providing for the deal. In terms of deal analysis “stress tests”, most sponsors and experienced passive investors would agree that break-even occupancy and default ratios are more important than DSCR.

6) IRR Partitioning

IRR is considered by most investors to be the preferred metric to compare the overall returns between deals because it combines the profit with the time value of money. As the saying goes, “A dollar today is worth more than a dollar tomorrow”. In comparison, average annualized return does not take this into account. As an investor, you want to see cash flow as quickly as possible so that you can have access to that money for other investments.

IRR partitioning (IRRP) takes this one step further by separating out the two main components of the returns: cash flow from operations (rental income, pet fees, late fees, laundry income, etc.) and cash flow from the sales proceeds and return of capital.

The cash flow from operations (CFO) is relatively more stable (i.e. less risky) than the income expected from the resale of the property. Rental income comps are easy to determine so the month-to-month cash flows are going to be more predictable. Because the exit cap rate may change by the time the sponsor decides to sell the asset in 3 to 10 years, the cash flow from the sale could be anyone’s guess.

After plugging in the pro forma cash flow data from many multifamily deals into my IRR partitioning spreadsheet, I have come up with some ratios between CFO and sales proceeds. On average, most of the 5-year multifamily deals had an IRR partition of 25/75 (CFO/Sales). In other words, the cash flow from rental income comprised 25% and the sales proceeds and return of capital comprised 75%. Ideally you would want to see the CFO percentage higher because this would mean that the returns will come back earlier – i.e. you have less of your money left in that deal.

For pro formas that are shorter than 5 years, the IRRP ratio will typically be skewed towards the sales side (more like a 20/80 split) because there will be fewer months to collect rent. And the opposite will be true for long holds like 10 years. These deals may approach closer to 50/50 because of the long rent collection time frame. Development deals and heavy, value-add properties will have a greater separation between the two percentages (assuming no refinance), such as 10/90 or 15/85 splits because rent collection will be low in the early years. Stabilized, A-class multifamily apartments that cash flow within the first few months should have percentages that are closer, such as 35/65 or 40/60. So if I see a 35/65 split on a 5-year hold, value-add, multifamily deal where the sponsor does not anticipate a refi, I’m usually interested in that deal and will further analyze the other metrics.

For more information on IRR partitioning, watch this video from one of our Left Field Investors Zoom meetings.


Investing in assets that have less risk will help you grow your money faster. Continually educating yourself and networking with others will also prove to be invaluable. Reading through PPMs and executive summaries can be daunting, but understanding these six metrics, among others, should give you more confidence in whether or not to invest in a given deal. The LFI Deal Analyzer can help guide you to make better decisions about investing in apartment syndications.

Steve Suh is an ophthalmologist and is one of the founders of Left Field Investors. After owning a few small residential rentals and seeing that it was not easily scalable, he transitioned to the world of passive investing in commercial real estate syndications. He enjoys learning and talking about real estate and hopes to educate more people about the merits of passive investing. You can contact him at steve@leftfieldinvestors.com.

Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.

Chris Franckhauser

Vice President of Strategy & Growth, Advisory Partner

Chris Franckhauser, Vice President of Strategy & Growth, Advisory Partner for Left Field Investors, has been involved in real estate since 2008. He started with one single-family fix and flip, and he was hooked. He then scaled, completing five more over a brief period. While he enjoyed the journey and the financial tailwinds that came with each completed project, being an active investor with a W2 at the time, became too much to manage with a young and growing family. Seeing this was not easily scalable or sustainable long term, he searched for alternative ideas on where to invest. He explored other passive income streams but kept coming back to his two passions; real estate and time with his family. He discovered syndications after reconnecting with a former colleague and LFI Founder. He joined Left Field Investors in 2023 and has quickly immersed himself into the community and as a key member of our team.  

Chris earned a B.S. from The Ohio State University. After years in healthcare technology and medical devices, from startups to Fortune 15 companies, Chris shifted his efforts to consulting and owning a small apparel business when he is not working with LFI (Left Field Investors) or on his personal passive investments. A few years ago, Chris and his family left the cold life in Ohio for lake life in the Carolinas. Chris lives in Tega Cay, South Carolina with his wife and two kids. In his free time, he enjoys exploring all the things the Carolinas offer, from the beaches to the mountains and everywhere in between, volunteering at the school, coaching his kids’ sports teams and cheering on the Buckeyes from afar.  

Chris knows investing is a team sport. Being a strategic thinker and analytical by nature, the ability to collaborate with like-minded individuals in the Left Field Community and other communities is invaluable.  

Jim Pfeifer

President, Chief Executive Officer, Founder

Jim Pfeifer is one of the founders of Left Field Investors and the host of the Passive Investing from Left Field podcast. Left Field Investors is a group dedicated to educating and assisting like-minded investors negotiate the nuances of the passive investing landscape and world of syndications. Jim is a former financial advisor who became frustrated with the one-path-fits-all approach of the standard financial services industry. Jim now concentrates on investing in real assets that produce cash flow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth.

Jim not only advises and helps people get started in passive real estate syndications, he also invests alongside them in small groups to allow for diversification among multiple investments and syndication sponsors. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts.

He has invested in over 100 passive syndications including apartments, mobile homes, self-storage, private lending and notes, ATM’s, commercial and industrial triple net leases, assisted living facilities and international coffee farms and cacao producers. Jim is constantly looking for new investment ideas that match his philosophy of real assets producing cash flow as well as looking for new sponsors with whom he can build quality, long-term relationships. Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Chad Ackerman

Chief Operating Officer, Founder

Chad is the Founder & Chief Operating Officer of Left Field Investors and the host of the LFI Spotlight podcast. Chad was in banking most of his career with a focus on data analytics, but in March of 2023 he left his W2 to become LFI’s second full time employee.

Chad always had a passion for real estate, so his analytics skills translated well into the deal analyzer side of the business. Through his training, education and networking Chad was able to align his passive investing to compliment his involvement with LFI while allowing him to grow his wealth and take steps towards financial freedom. He has appreciated the help he’s received from others along his journey which is why he is excited to host the LFI Spotlight podcast and share the experience of other investors and industry experts to assist those that are looking for education for their own journey.

Chad has a Bachelor’s Degree in Business with a Minor in Real Estate from the University of Cincinnati. He is working to educate his two teenagers in the passive investing world. In his spare time he likes to golf, kayak, and check out the local brewery scene.

Ryan Steig

Chief Financial Officer, Founder

Ryan Stieg started down the path of passive investing like many of us did, after he picked up a little purple book called Rich Dad, Poor Dad. The problem was that he did that in college and didn’t take action to start investing passively until many years later when that itch to invest passively crept back up.

Ryan became an accidental landlord after moving from Phoenix back to Montana in 2007, a rental he kept until 2016 when he started investing more intentionally. Since 2016, Ryan has focused (or should we say lack thereof) on all different kinds of investing, always returning to real estate and business as his mainstay. Ryan has a small portfolio of one-to-three-unit rentals across four different markets in the US. He has also invested in over fifty real estate syndication investments individually or with an investment group or tribe. Working to diversify in multiple asset classes, Ryan invests in multi-family, note funds, NNN industrial, retail, office, self-storage, online businesses, start-ups, and several other asset classes that further cement his self-diagnosis of “shiny object syndrome”.

However, with all of those reaches over the years, Ryan still believes in the long-term success and tenets of passive, cash-flow-focused investing with proven syndicators and shared knowledge in investing.

When he’s not working with LFI or on his personal passive investments, he recently opened a new Club Pilates franchise studio after an insurance career. Outside of that, he can be found with his wife watching whatever sport one of their two boys is involved in during that particular season.

Steve Suh

Chief Content Officer, Founder

Steve Suh, one of the founders of Left Field Investors and its Chief Content Officer, has been involved with real estate and alternative assets since 2005. Like many, he saw his net worth plummet during the two major stock market crashes in the early 2000s. Since then, he vowed to find other ways to invest his money. Reading Rich Dad, Poor Dad gave Steve the impetus to learn about real estate investing. He first became a landlord after purchasing his office condo. He then invested passively as a limited partner in oil and gas drilling syndications but quickly learned the importance of scrutinizing sponsors when he stopped getting returns after only a few months. Steve came back to real estate by buying a few small residential rentals. Seeing that this was not easily scalable, he searched for alternative ideas. After listening to hundreds of podcasts and attending numerous real estate investing meetings, he determined that passively investing in real estate syndications was the best avenue to get great, risk-adjusted returns. He has invested in dozens of syndications involving apartment buildings, self-storage facilities, resort properties, ATMs, Bitcoin mining funds, car washes, a coffee farm, and even a Broadway show.

When Steve is not vetting commercial real estate syndications in the evenings, he is stomping out eye diseases and improving vision during the day as an ophthalmologist. He enjoys playing in his tennis and pickleball leagues and rooting for his Buckeyes and Steelers football teams. In the past several years, he took up running and has completed three full marathons, including the New York City Marathon. He is always on a quest to find great pizza, BBQ brisket, and bourbon. He enjoys traveling with his wife and their three adult kids. They usually go on a medical mission trip once a year to southern Mexico to provide eye surgeries and glasses to the residents. Steve has enjoyed being a part of Left Field Investors to help others learn about the merits of passive, real asset investments.

Sean Donnelly

Chief Culture Officer, Founder

Sean holds a W2 job in the finance sector and began his real estate investing journey shortly after earning his MBA. Unfortunately, it could not have begun at a worse time … anyone remember 2007 … but even the recession provided worthy lessons. Sean stayed in the game continuing to find his place, progressing from flipping to owning single and multi-family rentals to now funding opportunities through syndications. While Sean is still heavily invested in the equities market and holds a small portfolio of rentals, he strongly believes passive investing is the best way to offset the cyclical nature of traditional investment vehicles as well as avoid the headaches of direct property ownership. Through consistent cash flow, long term yield and available tax benefits, the diversification offered with passive investing brings a welcomed balance to an otherwise turbulent investing scheme. What Sean likes most about the syndication space is that the investment opportunities are not “one size fits all” and the community of investors genuinely want to help.

He earned a B.S. in Finance from Iowa State University in 1995 and a MBA from Otterbein University in 2007. Sean has lived in eight states but has called Ohio home for the last 20+.  When not attending his children’s various school/sporting events, Sean can be found running, golfing, shooting or fly-fishing.

Patrick Wills

Chief Information Officer, Advisory Partner

An active real estate investor since 2017, Patrick Wills’ investing journey began like many others – after reading the “purple book” by Robert Kiyosaki. Patrick started with single family rentals, and while they performed well, he quickly realized their inability to scale efficiently while remaining passive. He discovered syndications via podcasts and local meetups and never looked back. He joined Left Field Investors in 2022 as a member and has quickly become an integral part of the team as Vice President of Technology.

An I.T. Systems Engineer by trade, he experienced the limitations of traditional Wall Street investing firsthand in his career and knew there had to be a better way to truly have financial freedom.

Unfortunately, that better way is inaccessible to those who need it most. His mission is to make alternative investments accessible to everyone who seeks to take control of their financial future and to pursue their passions in life.

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