Multifamily is one of the most common property types we see in Delaware Statutory Trust (DST) offerings. While apartment communities can be attractive investments, not every multifamily property presents the same opportunity. When evaluating these investments, I look beyond the projected cash flow and anticipated returns to understand the underlying real estate, the assumptions driving those projections, and the potential risks.

A property may be 95% occupied and located in a growing market, but that doesn’t necessarily mean it’s a good investment. We still need to understand what the sponsor paid for the property, how it compares to similar properties in the market, whether the projected income is realistic, and what the investment may look like at the time of sale.

When I underwrite a multifamily DST, I approach it much like I would if I were purchasing the entire apartment community. While the sponsor’s experience and track record are important considerations, ultimately, the real estate itself needs to make sense too.

Evaluating the Purchase Price

One of the first things I review is the property’s acquisition price. Specifically, I want to understand the price per unit, the going-in capitalization rate, and how the purchase compares to recent transactions involving similar properties in the area.

For example, if comparable apartment communities are selling for approximately $250,000 per unit and the DST is acquiring a property at $325,000 per unit, I want to understand what justifies that difference. It may be newer construction, a more desirable location, better amenities, or an opportunity for future rent growth. However, paying a premium needs to be supported by the underlying fundamentals.

I also consider the property’s age, physical condition, and replacement cost. These factors help us determine whether the acquisition price is reasonable relative to the market and the potential for future appreciation.

Understanding Occupancy and Rental Income

Occupancy is another important consideration, but I don’t look at physical occupancy alone. A property may report 95% occupancy, yet that doesn’t necessarily mean it’s collecting 95% of its potential rental income.

This is where understanding the difference between physical and economic occupancy becomes important. Physical occupancy reflects how many units are occupied, while economic occupancy takes into account the income actually being collected, including concessions, delinquency, and bad debt.

I also look at tenant turnover and renewal rates. A property experiencing significant turnover may incur higher leasing expenses, additional maintenance costs, and periods of vacancy between tenants. All of these factors can affect the property’s net operating income.

Beyond occupancy, I want to understand how current rents compare to market rents. For example, if residents are paying an average of $1,800 per month while comparable units in the surrounding market are leasing for $2,000, there may be an opportunity to increase rental income over time.

However, it’s important to understand how quickly those increases can realistically occur. Existing leases, tenant turnover, concessions, and local market conditions all influence the ability to increase rents. When reviewing projected returns, I pay close attention to how much future rent growth the sponsor is assuming and whether those assumptions are supported by historical performance and current market conditions.

Evaluating the Market and Future Apartment Supply

One area I pay particular attention to is new apartment supply. Population and employment growth are important, but they don’t tell the entire story.

A market may be experiencing strong population growth, attracting new employers, and seeing increased demand for housing. However, if thousands of new apartment units are being delivered into that same market, property owners may face additional competition.

New supply can put pressure on rental rates, increase concessions, and affect occupancy. Even in a growing market, it may take time for demand to absorb newly constructed units.

When evaluating a property, I want to understand how many apartment units currently exist in the surrounding area, how many are under construction, and how quickly new units are being leased. I compare that information with population growth, household formation, and employment trends to better understand the balance between supply and demand.

This is particularly important when a sponsor is projecting significant rent growth over the anticipated hold period. Those projections need to make sense in the context of the market.

Reviewing Operating Expenses and Capital Improvements

While much of the attention in multifamily investing goes toward rental income, expenses are equally important. Increasing rents doesn’t necessarily translate into increasing profitability if operating costs are rising at the same rate or faster.

I review historical expenses and compare them with the sponsor’s projections, paying particular attention to property taxes, insurance, payroll, utilities, repairs and maintenance, and property management expenses.

For example, if the underwriting assumes rental income will increase by 3% annually while expenses increase by only 2%, I want to understand whether that is realistic. Even relatively small differences in these assumptions can have a meaningful impact on net operating income over a five- to seven-year period.

I also look closely at the property’s physical condition and anticipated capital improvements. Apartment communities require ongoing investment, whether that’s replacing roofs and HVAC systems, renovating units, or maintaining common areas.

The question isn’t simply whether improvements will be needed, but whether the sponsor has appropriately budgeted for them and established sufficient reserves. Unexpected capital expenses can affect cash flow and potentially reduce distributions to investors.

New to DSTs and want the fundamentals in one place? Our DST Investor Guide covers fees, structure and what to look for before you invest.

Understanding the Financing Structure

For leveraged multifamily DST investments, financing is another major consideration. Debt can enhance returns when a property performs well, but it also introduces additional risks.

I look at the loan-to-value ratio, interest rate, loan maturity, amortization schedule, and whether the financing is fixed or floating (I don’t recommend floating debt in a DST structure!). I also evaluate the property’s ability to cover its debt payments from operating income.

One of the most important considerations is whether the financing structure aligns with the anticipated investment hold period. For a DST, we typically want a 10 year runway before debt matures. The financing should support the property’s investment strategy rather than create unnecessary pressure to sell.

Evaluating the Exit Strategy

One of the areas I pay the closest attention to is the projected exit. Ultimately, investors are relying not only on the property’s ability to generate income during the hold period, but also on its value when the investment is sold.

The exit capitalization rate is a significant component of that valuation.

For example, if a sponsor purchases a property at a 5% capitalization rate but assumes it will sell at a 4.5% capitalization rate several years later, that assumption can substantially increase the projected sale price and overall investor returns.

While capitalization rates can compress, meaning properties sell at higher valuations relative to their income, I don’t want an investment’s projected success to depend on that happening.

I prefer to evaluate how the investment performs under more conservative exit assumptions. What happens if the property sells at the same capitalization rate at which it was acquired? What happens if capitalization rates increase? Does the investment still produce a reasonable outcome?

These are important questions because an attractive projected internal rate of return doesn’t necessarily mean the underlying assumptions are realistic. I want to understand how much of the projected return is being generated through actual property operations and income growth versus assumptions about the property’s future sale price.

The Bottom Line

Multifamily real estate can offer several advantages, including a broad tenant base, recurring rental income, and opportunities for appreciation. However, the performance of an investment ultimately depends on the property, the market, the financing, and the assumptions used to project future returns.

When reviewing multifamily DST opportunities for clients, my objective is to understand both the potential upside and the risks. That means evaluating the property as it performs today, understanding where future growth may come from, and considering what happens if market conditions don’t unfold exactly as projected.

An investment shouldn’t require perfect rent growth, consistently high occupancy, and an aggressive exit valuation to be successful. I want to see an investment strategy supported by reasonable assumptions, with an understanding of the potential outcomes if conditions change.

That’s the difference between reviewing a sponsor’s projected returns and actually underwriting the real estate.

Ready to talk through your 1031 exchange options? Tell us a little about your property, exchange timeline and investment goals, and GCA 1031 will reach out to discuss DST, 721 UPREIT and other passive real estate strategies that may fit your objectives. To get started, you can learn more about Ashley Romiti or contact GCA 1031 to request a consultation.

This information is for educational purposes only and is not intended as tax, legal, or investment advice. DST investments involve risk, including potential loss of principal, and projected distributions or returns are not guaranteed. Investors should consult their tax, legal, and financial professionals regarding their individual circumstances.