I had an interesting conversation with an investor recently that left me shaking my head.
"I don't look at anything under 20% IRR," he declared confidently. "My inbox is full of deals. Why would I settle for less?"
I've heard this sentiment countless times, and it always makes me cringe a little. Not because targeting strong returns is wrong – we're all investing to make money, after all.
But using projected returns as your primary filtering mechanism is like buying a house based solely on the listing price.
There's so much more to the story.
The “Four Pillars” Framework
Here's the reality: any sponsor can engineer a spreadsheet to show spectacular returns.
Tweaking exit assumptions, adjusting rent growth rates, playing with debt terms – there are dozens of levers to pull to make the numbers dance.
But the real question isn't "what's the projected return?" It's "how much risk am I taking to achieve that return?"
This is where my four-pillar framework comes in. To properly evaluate the returns, you first need to evaluate:
The Sponsor
The Market/Macro Environment
The Asset
The Deal Structure
The Sponsor
One valuable lesson I learned during my time with a venture capital-backed company: VCs don't invest in ideas – they invest in teams.
This principle applies even more strongly to real estate syndications. Even the best asset or deal structure is likely to be a bad investment with the wrong sponsor.
What to look for:
Track record with similar deals AND business plans
Skin in the game (are they investing alongside you?)
Fee structure alignment (do they make more when you make more?)
Prior experience handling problems or pivoting
Think twice if you see a GP who's done 10,000 units of light value-add suddenly pivoting to ground-up development with no experienced partners. Past success in one area doesn't automatically translate to another.
Market & Macro
One of our podcast guests recently shared a profound insight: there will always be things wrong in your pro forma. You're never going to get everything right.
That's why you need strong tailwinds behind your investment.
For example:
We're very bullish on apartments right now because we see a looming shortage. Construction essentially stopped three years ago when rates started rising, and we're still massively underbuilt.
But we don't stop there. We’ve looked for markets poised to see outsized effects from this trend. Take Las Vegas – it's a major market that hasn't seen much new construction. When the shortage hits, the impact there will likely be amplified.
Market and macro-level tailwinds provide a greater margin of error and help to de-risk an investment.
The Asset
Every asset (the property) needs to answer a fundamental question: Who's going to buy what’s being sold?
In real estate terms: Will there be demand for these units once the business plan is executed? Are there more potential renters than available units?
The best business plan in the world means nothing if there's no market for the end product. And the world is littered with deals where sponsors spent millions on upgrades that the target market didn't actually value.
This is where understanding the future customer base becomes critical. The sponsor might think those quartz countertops and smart home features will command premium rents, but if the tenant base prioritizes affordability over luxury finishes, it’s solving for the wrong problem.
The Deal Structure
Even great deals can be torpedoed by poor structuring. You need to understand the full picture of how money flows through the investment – both in and out.
First, understand the capital stack. As an equity investor, you need to know exactly who’s getting paid before you, including understanding the senior loan terms and whether the stack includes any mezzanine debt or preferred equity.
But here's what I really focus on: how much of the projected return relies on what I call "uncontrollables."
Things like future cap rates, interest rates, or broader market conditions. If a small shift in exit cap rate tanks the entire return profile, that's a big red flag.
I much prefer deals where the majority of returns are driven by things the sponsor can actually control, like strategic renovations, operational improvements, or market repositioning.
Putting It All Together
Here’s the bottom line:
A 20% projected return from an inexperienced sponsor in a challenging market with a complex deal structure is far riskier than a 15% return from a proven operator in a growth market with strong fundamentals and simple structure.
The numbers alone don't tell the story. You need context.
Does this mean every pillar needs to be perfect? No. Strength in one area can compensate for weakness in another. But when you start seeing multiple weak pillars, it's probably time to walk away, no matter how good the returns look.