What a Transparent Underwriting Model Actually Looks Like (With Real Numbers)

After CrowdStreet collapsed and took investor capital with it, the real estate investing community arrived at a consensus: opacity is not a feature. It's a risk.

CrowdStreet's failure wasn't primarily a market failure. It was an information failure. Investors committed capital to deals without visibility into how the numbers were constructed — and when the assumptions fell apart, there was nothing to verify against. The underwriting was a black box. The loss was real.

At ProperLocating, transparency is not a marketing position. It's the methodology. Every deal we deliver to investors includes a full underwriting walkthrough — every assumption visible, every metric defined, every risk flagged. This is what that looks like, in three parts: an annotated walkthrough of a real deal, the definition game most operators play with cap rate / NOI / IRR, and the three-scenario stress test that separates serious underwriting from optimistic projections.

Part One: An Annotated Real-Deal Walkthrough

The property details have been generalized, but every number and methodology step is actual.

The Property

Asset: 24-unit multifamily community, Sunbelt secondary market Purchase Price: $2,400,000 Asset Class: Value-add multifamily — aging 1980s stock with below-market rents, cosmetic renovation runway Investment Thesis: Rent growth through unit improvements + operational efficiency gains, held 5 years, exit at stabilized cap rate

This is the starting point for every ProperLocating evaluation: we write down the thesis before we run any numbers. If the thesis doesn't hold, the numbers are beside the point.

Step 1: Income Assumptions

Gross Rental Income (GRI): $1,500/unit/month × 24 units × 12 months = $432,000

ProperLocating standard: We use current in-place rents, not projected post-renovation rents. Value-add upside belongs in the return projection, not the underwriting baseline. Operators who use projected rents in the income assumption are front-loading returns — watch for this.

Vacancy Allowance (7%): ($30,240) — Why 7%? Market vacancy in this submarket is 5.8%. We underwrote 120 basis points of cushion. Collection Loss (1%): ($4,018)

Effective Gross Income (EGI): $397,742

Step 2: Expense Assumptions

ProperLocating flag: The capex reserve at $300/unit/year is below our preferred $400–600/unit floor for 1980s vintage assets. We flagged this in the deal memo and applied a higher reserve in the downside scenario.

Net Operating Income (NOI): $397,742 − $92,219 = $305,523

Step 3: Cap Rate Analysis

Going-In Cap Rate: $305,523 / $2,400,000 = 12.73%

Market context: Comparable multifamily trades in this submarket are transacting at 7.5–8.5% cap rates. A 12.73% going-in cap reflects either a genuine value-add opportunity or a distressed asset — in this case, confirmed below-market rents with renovation runway. We verified 8 comparable sales within 18 months and 3 miles.

Step 4: Financing + DSCR

Loan Amount (70% LTV): $1,680,000 at 7.25% fixed, 30-year amort. Annual debt service: $137,532.

DSCR = NOI / Debt Service = $305,523 / $137,532 = 2.22

This is a strong DSCR. ProperLocating's minimum threshold is 1.25 at base case. A 2.22 provides significant buffer before the property fails to cover its debt from operations.

Step 5: Returns

Cash-on-Cash Return (Year 1): ($305,523 NOI − $137,532 Debt Service) / $720,000 Equity = 23.3% (unusually high because of below-market rent basis; Year 3 stabilized projects at 11.2%)

5-Year IRR Projection: Assumptions: 3% annual rent growth, 2% expense inflation, exit cap 7.75%, 60% renovation. Exit Year 5 NOI ~$328,000, exit price $4,232,000, remaining loan ~$1,580,000, net sale proceeds $2,652,000. 5-Year IRR ~18.4% (unlevered ~12.1%). Equity Multiple: 2.1×

Step 6: Stress Test

This is the section most deal presentations omit entirely.

Downside Scenario (vacancy +10 pts, expense +10%, exit cap +50 bps):

• NOI: $265,909. DSCR: 1.93 — still strong ✓. Cash-on-Cash: 17.8%

Worst Case (vacancy +15 pts, expense +5%, higher capex reserve):

• NOI: $237,827. DSCR: 1.73 — serviceable ✓. Cash-on-Cash: 13.9%

Exit Cap Expansion (+75 bps to 8.5%):

• Exit price compresses to $3,859,000. Net sale: $2,279,000. Revised IRR: ~14.8%

ProperLocating's read: This deal passes the stress test across all three downside scenarios. The DSCR holds above 1.25 even in worst case. The value-add basis provides sufficient cushion that reasonable variance doesn't break the deal economics. Verdict: PASSED.

Flags noted in deal memo: capex reserve below preferred floor; rent growth projections (3%) above submarket 5-year average (2.4%); exit cap assumption requires market stabilization.

Part Two: The Definition Game

Cap rate, NOI, and IRR all sound like objective numbers. They're not — every sponsor calculates them differently. Inflated NOI, forward-looking pro forma cap rates, and IRR cherry-picked by hold period are how bad deals hide in plain sight.

Cap Rate: Trailing vs. Pro Forma

Standard definition: Trailing 12-month NOI (actual, not projected) ÷ purchase price.

How it gets abused: Many operators present a "going-in cap rate" based on pro forma NOI — the projected NOI after lease-up, rent increases, or stabilization, not what the asset is currently generating.

A building at 85% occupancy with a pro forma assuming 95% occupancy after a 24-month value-add play will show a materially different pro forma cap rate than the trailing cap rate. The trailing cap rate tells you what you're buying. The pro forma cap rate tells you what the operator thinks it might become.

The test: When you see a cap rate, ask: is this trailing actuals or forward pro forma? If the operator can't give you both, you're working from a projection, not a measurement.

ProperLocating's standard: trailing 12-month verified NOI, every time. Forward projection presented separately as "projected stabilized cap rate" — never conflated with the entry price.

NOI: Where Operators Routinely Hide Costs

Three common cost-hiding techniques:

1. Maintenance reserves excluded or understated. Many operators use 3–5% of gross rent. Actual figures for older assets in active rental markets run 8–10%. The difference flows directly to stated NOI.

1. Property management fee understated. Realistic third-party management is 8–10% of collected rents. Deals projecting 5% management fees in high-labor markets are understating operating costs.

1. Vacancy assumptions too optimistic. A property at 95% occupancy will not hold that level through a full economic cycle. Modeling 5% vacancy against a market where comparables run at 8–12% average vacancy overstates NOI.

ProperLocating's standard: NOI calculated from rent roll actuals with expenses verified from historical records. Operator-supplied NOI figures are not used without independent reconciliation.

IRR: The Hold Period Manipulation

IRR is extremely sensitive to hold period selection. Operators systematically select the hold period that produces the highest headline IRR.

A deal generating a compelling 16% IRR on a 4-year hold might generate a modest 9% IRR on a 6-year hold if the exit is delayed. Presenting only the 4-year projection without the 6-year scenario is a meaningful omission.

ProperLocating's standard: IRR presented across multiple hold periods — base case (operator-projected), extended case (+2 years), and compressed case (-1 year). The range tells you how dependent the return is on exit timing precision.

Part Three: The Three-Scenario Stress Test

A stress test is not pessimism. It's calibrated scenario planning that answers a specific question: how much variance can this deal absorb and still meet minimum return requirements?

A well-structured stress test doesn't predict disaster. It defines the floor. Once you know the floor, you can decide whether the spread between floor and ceiling is a risk worth taking.

ProperLocating's Three-Scenario Model

Base Case: Operator projections accepted at face value after NOI verification. Occupancy at projected levels, expenses as modeled, exit at projected cap rate.

Downside Case: Three simultaneous stresses:

• Vacancy increases by 10 percentage points
• Operating expenses increase by 10%
• Exit cap rate expands by 50 basis points

Worst Case: Severe stress across all dimensions:

• Vacancy at submarket stress level (20–25% in many secondary markets)
• Operating expenses at 15% above projection
• Exit cap rate expansion of 100 basis points
• Hold period extension of 24 months

How Each Scenario Shifts the Numbers

On a representative deal — 32-unit multifamily, $4.2M purchase price, 65% LTV, projected NOI $280,000:

• Base: NOI $280K, DSCR 1.31x, Cash-on-cash 7.2%, IRR 14.1%
• Downside: NOI $232K, DSCR 1.08x, Cash-on-cash 4.1%, IRR 9.3%
• Worst: NOI $193K, DSCR 0.90x — operations no longer service debt. Cash-on-cash negative.

The base case is attractive. The downside case is still acceptable — an investor who can tolerate 9% IRR under stress has real margin of safety. The worst case shows the debt service pressure point.

DSCR as the Canary

DSCR falling below 1.0 is the clearest indicator of structural stress. It means operations no longer generate enough income to cover the loan payment — the deal is in breach or dependent on reserves.

DSCR at 1.0–1.1 is survivable but uncomfortable. DSCR at 1.2+ in the downside scenario suggests meaningful structural resilience. If the downside case drives DSCR below 1.0, investors need to understand the outcome: capital call potential, loan modification risk, or forced sale into a stressed market.

The GP Angle

If you're presenting deals to LPs, the stress test is increasingly expected. Post-CrowdStreet, the sophisticated LP is asking: "What does this look like if things don't go according to plan?"

Presenting a stress test alongside the base case is not a liability. It's credibility. It tells your LP: "We modeled the downside. We know where the floor is. Here's why we still think this is worth your capital."

What to Ask Every Deal Sponsor

Any deal you evaluate — regardless of platform or sponsor — should be able to answer:

1. What income methodology did you use? (Trailing 12 months or projected?)
2. What vacancy assumption, and how does it compare to market?
3. What expense items are excluded from the model?
4. What is the DSCR at base case and under a 10-point vacancy spike?
5. What is the exit cap rate assumption, and how does IRR change if it expands 75 bps?
6. What are the top 2 risks you'd flag on this deal?

A sponsor who can't answer those questions confidently hasn't underwritten the deal. A sponsor who won't answer them is making a choice.

ProperLocating answers all six — on every deal, before it reaches your inbox. NOI reconciliation, definitional clarity on every metric, three-scenario stress test, named risks. The methodology isn't proprietary. The discipline is.

[Download a sample ProperLocating underwriting →]