As a passive investor in multifamily real estate, one of the most challenging aspects is accurately comparing deal structures across different investment opportunities.

Many investors, both new and experienced, often fall into the trap of focusing on a single metric or making apples-to-oranges comparisons that don’t reveal the true economic picture.

The Two Components Every LP Must Evaluate

When analyzing the economics of any multifamily investment opportunity, there are two fundamental components to consider:

The Waterfall (also known as the split or promote)

The Fees (what the sponsor charges regardless of performance)

Let’s break down how to properly evaluate each…

Beyond the Preferred Return

Most passive investors are familiar with seeing an 8% preferred return and a 70/30 split (70% to LPs, 30% to GPs). When they encounter a structure that deviates from this—perhaps a 7% pref with a 60/40 split—many immediately become concerned.

Here’s what experienced investors know: The preferred return and split percentages should never be evaluated in isolation.

A seemingly “LP-friendly” waterfall with an 8% pref and 80/20 split might actually deliver lower returns than a 7% pref with a 60/40 split when you factor in the complete fee structure.

An often-overlooked fee component

While many LPs focus intensely on the waterfall, they frequently overlook the impact of fees, which include:

• Acquisition fees
• Asset management fees
• Construction management fees
• Disposition fees

Unlike the promote, which is tied to performance, these fees are paid to the sponsor regardless of how well the investment performs. A sponsor charging lower fees may justifiably take a higher percentage of the upside through the promote structure (which also further aligns the incentives between LPs and GPs).

Deal size matters!

Another critical consideration is the size of the deal itself. Generally speaking:

Smaller deals (10-50 units) typically have more GP-friendly structures**, broadly speaking, because the economics of these deals require it (but importantly, also support it). The sponsor is doing nearly the same amount of work as with larger deals, but with less total dollars to work with.

Larger deals (100+ units) should typically offer more LP-friendly structures, as the economics become more favorable to the general partner due to the scale of the opportunity.

** That said, smaller deals can often complete renovations and return significant capital within 12 months, while larger projects might take 24-36 months to reach the same milestone.

Additionally, given that this is a significantly more inefficient component of the market, it’s far easier for GPs to identify truly discounted opportunities, which can translate to higher net returns to LPs despite GPs asking for a slightly more significant split (has been the case in our deals)!

The takeaway for sophisticated investors

The key is to evaluate the entire economic structure holistically, not in isolation:

• Compare waterfall structures across opportunities
• Carefully assess fee structures and their impact on returns
• Consider the deal size and how it affects the economic justification
• Look at projected timelines for capital return and their impact on IRR

Only by examining these elements together can you accurately assess whether a deal structure truly aligns incentives between the sponsor and investors.

Want to dive deeper into successful passive investing?

For a more comprehensive look at evaluating not just deal structures, but entire investment opportunities, I highly recommend our recent conversation with Aleksey Chernobelskiy in Episode #266 of our podcast.

#266: The 3 Pillars Of Successful Passive Investing + Pitfalls That GPs Can Avoid When Marketing Deals with Aleksey Chernobelskiy. Listen to the episode on iTunes or Spotify!

Aleksey breaks down his three-pillar approach to evaluating investments, focusing on:

• Execution assessment (evaluating sponsor track records beyond the marketing)
• Alignment of interests (the nuances of deal structures that many miss)
• Property evaluation (looking beyond the pro forma numbers)

He also provides invaluable insights on navigating capital calls and making informed decisions when faced with unexpected funding requests—something every passive investor should understand before, not after, it happens.