Red flags as a metaphorical warning sign have been used to describe “sketchy” or “questionable” behavior since the 18th century. [1] In a multifamily private placement, red flags can range from potential problems or concerns to more imminent conflicts. It’s the cringey equivalent of referring to oneself in the third person in modern dating usage.

When evaluating a multifamily private placement deal or firm, several red flags can indicate a less-than-ideal investment. While sponsors and firms may differ in how they present deals, passive investors should be aware of common warning signs that suggest higher risk or poor alignment. 

This article will address four specific cautions to consider when entering a multifamily private placement deal. 

1. OVERESTIMATED/INACCURATE METRICS

For passive investors, overly optimistic or inaccurate metrics can present red flags before investing. For example, if the property’s vacancy and turnover rates are high, this could indicate operational deficiencies and/or an underperforming market. In that context, if the sponsor targets 99% occupancy in a market with little job or population growth, that should give investors pause. 

Similarly, the property may lack upgraded amenities, but it should raise questions if the sponsor anticipates a 10% rental rate increase with no clear plan to justify such a rise. Does the sponsor’s plan to completely renovate the property in hopes of attracting higher-paying residents make sense if the area’s job market is weak?   

These kinds of assumptions often show up in rent growth projections. As Breneman Capital puts it, “Even small changes in rental levels can have large implications on an investment’s projected return.” [2] This is especially true when the business plan relies on adding value through renovation because metrics like rent growth and occupancy can be easily overstated, distorting the investment’s actual risk-return profile. Ultimately, passive investors need to take a step back and ask if the sponsor’s projections, which are required to achieve the targeted returns, make sense.

2. HEAVY RELIANCE ON VARIABLE-RATE DEBT & OVER-LEVERAGING

Debt must be used appropriately to achieve the best results in multifamily investing. Debt (or leverage) is a tool that allows investors to buy assets using less of their capital. However, be wary of deals that rely heavily on floating-rate debt or those that are overleveraged. [3] 

Variable, or “floating,” interest rates fluctuate with market trends. Variable-rate loans tend to have lower rates than fixed loans at the start and can later increase. Payments on variable-rate loans can fluctuate, increasing financial risk and making budgeting more complicated, especially in a rising interest rate environment. Without safeguards like interest rate caps or a clear refinance strategy, variable-rate debt can strain the property’s cash flow and investor returns. Variable-rate debt has its place in a well-thought-out debt strategy. Still, it’s essential to ensure the sponsor uses it appropriately with a plan to manage the associated risks.   

At the same time, highly leveraged deals, meaning the sponsor uses a large amount of debt relative to equity, leave very little room for error. Even small dips in occupancy or rent collections can create challenges in covering debt service and, in extreme cases, may lead to capital calls or forced sales. 

3. CALLING CAPITAL

The phrase “calling capital” refers to when a sponsor requests additional funds from its limited partners (LPs) to cover unexpected costs or avoid a distressed sale. [4] While various reasons can lead to a capital call, it typically occurs when the market is volatile, the budget is overrun due to unforeseen expenses, or the senior debt (such as a mortgage) has been modified. [4] 

For example, the property has unexpected expenses, and the sponsor has not established capital reserves. [5] One of the best ways for a passive investor to avoid this risk is to partner with a sponsor who has a strong track record of preventing capital calls (ideally, one who has never issued one). Sponsors who plan for downside scenarios, have adequate reserves, underwrite, and operate conservatively are less likely to find themselves in a position where they need to ask investors for money. If a sponsor has never had to call capital, that’s typically a good sign of prudent management and sound planning. 

4. LOW FINANCIAL STAKE

Finally, it is crucial to determine the financial stake a sponsor or general partner (GP) has in the deal. [3] This is commonly referenced as “skin in the game” in real estate jargon and refers to how much cash the sponsor has invested in the deal. [6] Determining whether the sponsor’s stake is sufficient will depend on your unique perspective. 

Still, generally speaking, a well-founded sponsor with a dependable track record will invest anywhere from 5% to 20% of the total equity necessary for a deal. [7] Sometimes, a sponsor’s stake is less in equity and more in debt recourse. 

Recourse debt refers to loans wherein the lender is legally allowed to collect what is owed for the debt even after taking collateral (e.g., a property). With recourse debt, the borrower, or in the case of a multifamily property, the general partner, is personally liable for the debt. 

Shaun M. Henley, J.D., L.L.M., writes that “even though the debt is recourse to the LLC, the members’ limited liability protects them from any obligation to fund the debt—in the event of a default, the creditor can attach only the LLC’s assets.” [8] Ensure you thoroughly review the deal’s PPM to understand what the sponsor has at stake and assess whether their incentives align with yours.

CONNECT WITH AN INSTITUTIONAL REAL ESTATE OWNER/OPERATOR

BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying the most profitable assets and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while mitigating investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units.

Remember that no investment is without risk. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.

Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect Bam Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. Bam Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.

© 2025 Bam Capital. All rights reserved.

SOURCES:

[1]: Enroute Indian History. (2024). “Unveiling Gen Zs Embrace of the Term ‘Red Flag’ and the Culture of Colour Symbolism.” https://enrouteindianhistory.com/unveiling-gen-zs-embrace-of-the-term-red-flag-and-the-culture-of-colour-symbolism/

[2]: Breneman Capital. (n.d.). “Red Flags to Lookout for When Underwriting Multifamily Properties?” https://www.breneman.com/blog/what-are-some-red-flags-in-underwriting-assumptions 

[3]: Warehouse Hotline. (2024). “Red Flags to Watch Out For in Real Estate Syndication Investments.” https://www.linkedin.com/pulse/red-flags-watch-out-real-estate-syndication-aviva-sonenreich-huypc

[4]: Life Bridge Capital. (n.d.). “Understanding Capital Calls in Multifamily Syndication.” https://lifebridgecapital.com/2024/05/21/understanding-capital-calls-in-multifamily-syndication/#:~:text=Capital%20calls%20are%20requests%20from,regulatory%20changes%20that%20impact%20expenses. 

[5]: BAM Capital. (2023). “5 Questions investors might consider in multifamily syndication.” https://bamcapital.com/questions-ask-before-investing-multifamily-syndication/ 

[6]: Janover, Inc. (2022). “Skin In The Game.” https://www.multifamily.loans/skin-in-the-game/ 

[7]: EquityMultiple. (n.d.). “Glossary for Investors.” https://equitymultiple.com/glossary/sponsor#:~:text=Not%20only%20are%20general%20partners,may%20invest%20up%20to%2020%25.

[8]: The Tax Adviser. (2024). “Calculating an LLC member’s amount at risk.” https://www.thetaxadviser.com/issues/2024/jun/calculating-an-llc-members-amount-at-risk/#:~:text=Under%20state%20law%2C%20even%20though,attach%20only%20the%20LLC’s%20assets.