Every real estate model looks solid at first glance.
Numbers line up.
Returns clear the hurdle.
However, once you slow down and question the assumptions, IRR often collapses faster than expected.
This article breaks down which underwriting assumptions usually fail first, why they fail, and how experienced investors spot trouble early.
Why IRR Breaks Before the Deal Does
IRR rarely dies from one big mistake.
Instead, it erodes through small optimistic assumptions stacked on top of each other.
Consequently, a deal that looks conservative on paper often relies on aggressive inputs behind the scenes.
That disconnect creates most underwriting failures.
Exit Cap Rates: Where Models Get Fragile Fast
Exit cap rates quietly control more value than any other input.
While sponsors often frame exit pricing as a market constant, buyers price risk, not stories.
For example, assume a stabilized NOI of $3 million.
At a 5.25 percent exit cap, value lands near $57 million.
At 6.25 percent, that same income supports closer to $48 million.
Suddenly, equity loses nine figures without any operational change.
According to CBRE, U.S. multifamily cap rates have reset materially since 2022, particularly in value add strategies.
https://www.cbre.com/insights/books/us-real-estate-market-outlook
Therefore, underwriting exits tighter than entry pricing rarely reflects reality.
Rent Growth Assumptions Break Second
After exit pricing, rent growth usually does the next round of damage.
Sponsors love smooth growth curves.
Markets never behave that way.
In many metros, supply cycles flatten rents for years before growth resumes.
Others see bursts followed by stagnation.
Data from Apartments.com shows national rent growth hovering near one percent annually, with sharp regional divergence.
https://www.apartments.com/research/
As a result, models that assume steady three to four percent annual growth without documented drivers tend to fail stress tests.
Comparable Properties That Are Not Comparable
Next, underwriting falls apart when comps stretch reality.
Class A rents get applied to Class B assets.
Urban comps get pulled for suburban properties.
New construction pricing gets blended into 1980s inventory.
Lenders reject this logic quickly.
Freddie Mac underwriting guidelines require true physical and locational alignment when validating rent assumptions.
https://mf.freddiemac.com/underwriting
When comps inflate income, IRR inflates with them.
Stabilization Timelines That Ignore Friction
Another common issue shows up in lease up assumptions.
Many models assume instant stabilization.
Vacancy disappears overnight.
Concessions never appear.
In practice, renovations disrupt occupancy.
Leasing takes time.
Concessions remain sticky during competitive cycles.
RealPage reports that concessions remain elevated across many U.S. markets, even as demand stabilizes.
https://www.realpage.com/analytics/
Ignoring this friction creates early cash flow strain and forces capital calls.
Reserves That Look Efficient but Act Risky
Sponsors often trim reserves to boost returns.
That decision almost always backfires.
Thin operating reserves magnify small disruptions.
Light CapEx contingencies explode when construction costs move.
Fannie Mae requires minimum replacement reserves for a reason.
Those thresholds reflect decades of asset performance data.
https://www.fanniemae.com/multifamily
Reserves protect downside.
They do not destroy upside.
Sensitivity Analysis Tells the Truth Early
The fastest way to expose weak assumptions is simple.
Change one variable at a time.
Increase exit cap rates by 50 basis points.
Flatten rent growth for two years.
Delay stabilization by six months.
Strong deals survive those changes.
Fragile deals unravel immediately.
Without sensitivity analysis, underwriting becomes guesswork dressed up as math.
What Experienced Investors Look For Instead
Seasoned investors focus less on headline IRR and more on margin.
They ask how many assumptions must go right.
They ask how the deal performs when one goes wrong.
That mindset separates durable investments from optimistic projections.
Why Market Context Still Matters
Even disciplined underwriting must respect macro conditions.
Markets undergoing zoning reform, infrastructure expansion, or institutional inflows deserve different risk treatment.
For example, long term development pressure in the Bay Area reshapes underwriting expectations across surrounding submarkets.
Internal link suggestion: Bay Area development risk analysis using “Bay Area real estate development trends”
https://temblog.org/the-new-bay-area-5-mega-projects-reshaping-the-real-estate-landscape-in-2025/
Likewise, liquidity driven seller motivation changes underwriting logic entirely.
Internal link suggestion: distressed pricing analysis using “selling property under pressure”
https://temblog.org/sell-your-home-fast-gilroy-3/
Context sharpens assumptions.
Ignoring it dulls returns.
The Real Lesson from Second Looks
Independent reviews rarely kill deals outright.
Instead, they reset expectations.
A projected 17 percent IRR becomes 11.
A low risk profile becomes moderate.
Equity terms shift accordingly.
That recalibration protects capital.
Ultimately, underwriting discipline matters more than presentation quality.
Models reward realism, not confidence.
Final Takeaway
IRR dies first when assumptions stretch too far.
Exit pricing, rent growth, comps, stabilization timing, and reserves deserve constant skepticism.
Investors who challenge those inputs early avoid learning expensive lessons later.
