💣 $9M Mistake? Inside a Multifamily Deal Doomed From the Start
A $9M loss isn’t just about numbers—it’s about misunderstood roles, misplaced trust, and risks investors never saw coming
By Mark Kenney | Think Multifamily
I was recently asked to review a 300+ unit multifamily deal for an investor. First — kudos to the investor for realizing they were in over their head and engaging someone with real experience. That decision may have saved them their $300k investment.
Because here’s the truth:
This deal was an absolute disaster — before it even began.
The fact that the sponsor raised over $10 million for this opportunity is not just alarming — it's a reminder that many investors are still making the same mistakes that led to the last downturn.
Let’s break it down.
🧭 1. Market & Macro Overview
The Midwest is generally solid and has held up better than many Sunbelt markets recently.
The deal claimed to provide immediate cash-flow. But based on current revenue and adjusted expenses, there’s no cash flow at all and in fact they are likely going to be negative.
Revenue is reported on an accrual basis — which likely means it’s overstated because accrual includes Revenue that has never been collected yet.
Built in the 1960s, the property is prone to hidden plumbing, electrical, and structural issues (ask me how I know).
There are lawsuits and likely liens tied to the property. The seller disclosed some law suits, but I suspect there are also liens. And buyers inherit that risk. The contract does not account for this situation.
💰 2. Financing & Capital Stack Concerns
Reliance on a bridge loan — short-term, high-risk financing.
CapEx completion guarantees could trigger full recourse if timelines aren’t met.
No mention of prepayment penalties, yet refinance projections assume agency debt in year 2.
Sponsor exit fee: 2% ($844K) even if the deal underperforms.
📉 3. Returns & Pro Forma Assumptions
Year 1 NOI projected to double from $2M to $4M — unrealistic.
Claimed 50% average annualized return — a major red flag.
Operating reserves dangerously low.
Exit price projections: $38M–$51M vs. appraisal at $20M.
No property management budget included.
📉 4. Rent Roll & Occupancy Review
Physical occupancy: 75%.
Bad debt reported as $0 for 10 months — impossible; actuals suggest ~$500K annually.
Economic occupancy closer to 60% or lower.
Average collected rent: $600 vs. projected $975.
19% of tenants on eviction list.
🏚️ 5. Section 8 & Tenant Issues
Heavy Section 8 exposure is presented as a positive — but many lenders limit how much Section 8 they'll allow due to risk.
No tenant A/R aging or lease audit reports provided.
🔍 6. Due Diligence Gaps
Unclear if 100% of units were walked.
No plan to re-walk units before closing — which is crucial, especially in older properties with high vacancy.
Missing utility bills, contract service agreements, and no legal language in the PSA to address discrepancies.
🧑💼 7. Property Management
Property manager fee on the pro forma is 7%, which is double the industry norm.
PM company appears to be single-family focused, not multifamily specialists.
📊 8. T12 Financial Review
Financials are presented on accrual, not cash basis — so revenue isn’t real.
Gross potential rent is flat.
Water expenses are rising significantly — potential leaks not addressed. Some of this can be due to an increase in occupancy, but the occupancy has not increased that much.
🧾 9. Taxes
No tax consultant involved.
Property taxes can vary dramatically by county — this is not optional due diligence.
🛠️ 10. CapEx & Physical Risk
CapEx contingency is only 10% — far too low for a 1960s building.
I’d recommend 25% minimum, based on what I saw in photos/videos.
Windows and balconies are in rough shape. At the time of a refinance, Fannie/Freddie may require full replacement, which adds no income but significant cost.
Likely aluminum wiring is likely at the property— which poses insurance and lender problems.
⚠️ My Takeaway
This deal is a high-risk, high-execution turnaround with aggressive underwriting and dangerous blind spots. The gap between current performance, projected NOI, and exit value is staggering.
Deals like this are exactly why investors lose all their money.
✅ What You Should Learn From This
Trusting the sponsor isn’t enough.
Glamorous pitch decks and projected returns aren’t enough.
Even good people can put capital at risk when they don’t know what they don’t know.
Before you invest, you need to:
Understand how to read a real rent roll and T12.
Ask hard questions about CapEx, lending, exit risk, and rent assumptions.
Know what due diligence actually protects you from.
Your FREE Resource
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