Every sponsor says they underwrite conservatively. Almost none show you what that means. This article opens our underwriting playbook so you can see exactly how we evaluate a multifamily deal before we ever present it to investors, and so you can hold us, or any sponsor, to a measurable standard.
The Principle: Protect Capital First
Our underwriting exists to answer one question: how does this deal perform when things go wrong? Any spreadsheet can produce an attractive projected return by nudging rent growth up and exit cap rates down. The discipline is in refusing to do that. We underwrite to protect capital first and generate returns second, which means our base case has to survive scrutiny and our downside case has to be survivable.
Rent Growth: Below Trend, Never Aspirational
Projected rent growth is the assumption that most often flatters a bad deal into looking like a good one. We cap our assumptions at or below the market’s long-run average, regardless of what recent years produced, and we hold year-one growth near zero on deals in submarkets still absorbing new supply. If a deal only works with 5% annual rent growth, it does not work.
On value-add deals, renovation premiums are underwritten from comparable renovated units already achieving those rents in the same submarket, not from a rosier market survey. We also assume only a portion of units achieve the full premium, because in practice some never do.
Exit Assumptions: The Cap Rate Must Expand
The single most common trick in syndication underwriting is projecting a sale at a lower cap rate than the purchase, which manufactures appreciation out of thin air. We do the opposite: our models assume the exit cap rate is meaningfully higher than our entry cap rate, typically by 50 basis points or more over a five-to-seven-year hold. If the deal still delivers acceptable returns while assuming buyers pay less per dollar of income at exit than we did at entry, actual market outcomes become upside rather than a requirement.
Debt: Boring on Purpose
Leverage amplifies everything, including mistakes, so our debt standards are deliberately unexciting. We target moderate leverage rather than the maximum lenders offer, prioritize fixed-rate financing or capped floating rates so a rate spike cannot run away with the deal, and require debt service coverage with a comfortable cushion above lender minimums from day one, not after the business plan matures. We match loan term to business plan with room to spare, because being forced to sell or refinance into a bad market is how good properties produce bad outcomes.
Reserves: Raised Up Front, Not Hoped For
Every acquisition budget includes capital reserves raised at closing: an operating reserve covering months of expenses and debt service, and a capital expenditure reserve sized to the renovation scope plus contingency. Reserves are the difference between a rough year and a capital call. We would rather modestly dilute projected returns with a proper reserve than come back to investors with our hand out.
The Stress Tests
Before any deal moves forward, it must remain solvent through scenarios worse than we expect:
- Vacancy shock: occupancy falling well below underwritten levels for a sustained period, while still covering debt service from operations and reserves.
- Flat growth: zero rent growth for the full hold, testing whether the deal survives on its entry economics.
- Exit delay: a hold extended two years past the target, testing loan maturity, reserve depletion, and investor patience.
- Combined downside: softer rents, higher expenses, and a higher exit cap together. The deal does not need to look good here; it needs to return capital.
What Makes Us Walk Away
Most deals fail our screen, and the reasons repeat: pricing that only works with aggressive rent growth, deferred maintenance beyond what reserves can responsibly cover, submarkets with heavy incoming supply and no offsetting demand story, floating-rate debt without protection, or seller expectations set by 2021 pricing. Walking away is not a failure of sourcing; it is the underwriting doing its job. We would rather present investors with fewer, better deals than a steady pipeline of compromises.
Alignment: We Invest Beside You
Finally, we co-invest in every deal we sponsor. When the sponsor’s own capital sits in the same structure as yours, conservative underwriting stops being a marketing claim and becomes self-interest. Our assumptions are the ones we are willing to bet our own money on.
Frequently Asked Questions
What should I ask any sponsor about their underwriting?
Ask for the rent growth assumption versus the market’s long-run average, the entry versus exit cap rate, the debt structure and coverage cushion, and the size of reserves raised at closing. Evasive answers to any of these are themselves an answer.
Conservative underwriting means lower projected returns. Why is that better?
Projected returns are promises made by a spreadsheet; realized returns are what you keep. Conservative assumptions mean the projection is more likely to be met or beaten, and that the deal survives the years the spreadsheet didn’t predict.
Does Broadstone Capital share its underwriting model with investors?
We walk every prospective investor through the full model and assumptions for any active opportunity. Schedule a consultation and we will show you, line by line, what we assume and why.
This article is for informational purposes only and does not constitute investment advice. All investments involve risk, including the potential loss of principal.
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