Financing & Underwriting Basics

November 2025

Underwriting is where assumptions become outcomes. In real estate syndications, underwriting refers to evaluating a property, market, business plan, and capital structure to see whether projected returns are achievable and whether downside risk is appropriately managed.

This article explains the core financing and underwriting concepts passive investors should understand, and how we approach risk in practice.

Underwriting Starts With Approach and Discipline

Strong underwriting starts with approach and discipline, not spreadsheets.

Conservative underwriting is centered on downside protection first, rather than maximizing projected returns. Assumptions are evaluated based on how a deal performs when conditions are less favorable, not only when everything goes right.

Metrics matter, but they are tools – not conclusions.

How Real Estate Deals Are Typically Financed

Most real estate syndications use a combination of debt and equity.

• Senior Debt (Mortgage)
  Senior loans typically represent 60–75% of a property’s value, depending on asset type, business plan, and market conditions. These may be long-term fixed-rate loans or shorter-term bridge financing.

• Equity
  The remaining capital is raised from limited partner investors and the general partner team.

• Preferred Equity or Mezzanine Debt (Occasionally)
  In larger or more complex transactions, additional layers of capital may be used. These structures are less common in traditional multifamily syndications and introduce added complexity and risk.

Typical Leverage Ranges by Asset Type

Leverage levels vary by asset type and execution risk.

As general reference points:

• Stabilized multifamily: often underwritten in the 60-70% LTV range

• Value-add multifamily: may approach the higher end of that range during renovation periods, depending on cash-flow stability

• More operationally intensive assets: typically warrant more conservative leverage

These are not rules, but guidelines used to balance return potential with downside protection.

For a conceptual discussion of how leverage affects outcomes, see Understanding Leverage in Real Estate Syndications.

Debt Coverage and Margin of Safety

One of the most important underwriting concepts is debt service coverage, commonly referred to as DSCR.

Rather than focusing on minimum lender requirements, underwriting should evaluate whether coverage provides a meaningful margin of safety if assumptions are missed. In practical terms, DSCR measures how much income a property generates relative to its required debt payments and is calculated as: Net Operating Income ÷ Required Debt Payments

It’s important to evaluate:

• How much income can decline before debt service becomes constrained

• Whether cash flow remains positive under stress

• How coverage evolves over time, not just at acquisition

As a general guideline, we look for a minimum DSCR of ~1.25 at stabilization, with stronger deals underwriting closer to 1.40 or higher to provide additional margin for error. Coverage is a buffer – not a box to check.

Expense Assumptions Matter as Much as Revenue

Expenses often drive downside risk more than revenue.

Underwriting must account for:

• Property taxes, including reassessment risk at acquisition

• Insurance costs, which can vary significantly by geography and climate exposure

• Labor and payroll, particularly in tight labor markets

• Turnover and concessions, which affect make-ready costs and effective rent

• Capital expenditures, especially for value-add business plans

As a baseline, we typically look for underwriting that assumes 2–3% annual expense growth, rather than flat expenses, and verifies major CapEx items with third-party input rather than estimates.

Expense behavior by asset type is discussed further in Real Estate Asset Classes: Risks, Returns, and Where Syndications Fit.

Stress Testing and Downside Analysis

Thoughtful underwriting asks uncomfortable questions.

At a minimum, we stress test for:

• Flat or minimal rent growth for extended periods

• Higher-than-expected expense growth, particularly taxes and insurance

• Lower occupancy or delayed stabilization

• Refinancing under less favorable interest-rate conditions

The objective is not to eliminate risk, but to ensure the deal remains operationally viable and avoids forced decisions during periods of stress.

A deal that performs reasonably under conservative scenarios is often more attractive than one that relies on ideal conditions.

Financing Structure and Risk Alignment

Not all debt structures create the same risk profile.

Underwriting evaluates whether financing supports the business plan or introduces unnecessary dependence on favorable conditions.

• Fixed vs Floating Interest Rates
  Fixed-rate debt provides predictability and limits exposure to rising rates. Floating-rate debt can offer flexibility but introduces interest-rate risk and should be evaluated conservatively.

• Loan Term Relative to the Business Plan
  Loan maturity should extend beyond the planned execution period. Deals that rely on refinancing at a specific point in time carry additional risk.

• Amortization vs Interest-Only Periods
  Amortizing loans improve equity position over time and enhance downside protection. Interest-only periods can support early cash flow but warrant caution over longer holds.

• Dependence on Refinancing
  Underwriting should not require refinancing to achieve acceptable outcomes. Refinancing may enhance returns, but resilient deals remain viable without it.

Financing should support the strategy – not force outcomes through timing or market conditions.

How Underwriting Fits Into Deal Evaluation

Underwriting should be considered alongside:

• Market and submarket selection

• Asset type and operational complexity

• Sponsor experience and execution capability

Market context is addressed in Market & Asset Selection, while return mechanics are covered in How Returns Work in Syndications.

A Practical Way to Think About Underwriting

Rather than asking whether assumptions are “aggressive” or “conservative,” a more useful question is:

How much room does this deal have if assumptions are wrong?

That perspective shifts focus from projections to resilience and helps investors evaluate opportunities with discipline rather than optimism.

Final Perspective

Underwriting does not eliminate risk.

It clarifies where risk exists, how it is managed, and whether projected returns are justified given the assumptions required to achieve them. For passive investors, understanding underwriting fundamentals is essential to evaluating syndications thoughtfully.

Continue Learning

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: Risks & Red Flags in Real Estate Syndications