The first question most investors ask about a deal is "What's the projected return?"

It's the wrong first question.

The right first question is "What can go wrong, and what happens to my money if it does?"

Returns matter. Of course they do. But chasing yield without understanding downside risk is how investors lose principal. And losing principal isn't a setback you recover from with a good quarter. It's a hole that takes years to climb out of, if you ever do.

Every deal we structure starts with one principle: protect the capital first. Everything else, the returns, the upside, the promote, all of it comes after we have answered the question of what happens when things go sideways.

Because things go sideways. Not if. When.

The Five Pillars of Capital Preservation

We don't have a secret formula. What we have is a framework that forces discipline into every acquisition, every underwriting model, and every capital structure. Five pillars. None of them are optional.

1. Downside Scenario Modeling

Most pro formas show you three scenarios: conservative, base case, and aggressive. The problem is that most people's "conservative" scenario is still optimistic. It assumes stable occupancy, modest expense growth, and no surprises.

That isn't conservative. That's base case with slightly lower rent growth.

Real downside modeling asks ugly questions:

What happens if vacancy hits 15%? Not the market average of 5-6%. Fifteen percent. A major employer leaves the area. A competing property opens two blocks away and undercuts your rents. Your best tenants leave in the same quarter. Can the deal survive?

What happens if interest rates go up 200 basis points? If you're in a floating rate loan or facing a refinance in year 3, what does your debt service coverage ratio look like when your rate jumps from 6.5% to 8.5%? Is the deal still cash-flowing or are you feeding it from reserves?

What happens if a major CapEx event hits in year 2? The roof is "5-7 years remaining life" according to the inspection. What if the inspector is wrong and you need a $120,000 roof in 18 months? Where does that money come from?

We model every deal through these scenarios before we make an offer. If the deal doesn't survive the stress test, we don't do the deal. Period. It doesn't matter how good the base case looks.

I would rather pass on a good deal than lose money on a great-looking one.

2. Reserve Requirements

We won't close a deal without proper reserves in place. This is non-negotiable.

Our minimum reserve structure:

6 months of operating expenses. Not debt service, operating expenses. That means if every single tenant stopped paying rent tomorrow, we can keep the lights on, pay the insurance, cover the taxes, and maintain the building for six months while we solve the problem.

CapEx reserve. Funded at acquisition based on the property condition assessment. If the building needs a roof in 3 years and new HVAC in 5, those dollars are earmarked on day one. They aren't "we will figure it out later." They're in the account.

Lease-up reserve. If the building has vacancy or we're projecting renovations that will create temporary vacancy, we budget that into the capital raise. We don't assume instant lease-up at pro forma rents.

Reserves aren't dead money. They're insurance against the scenarios that kill deals. The operators who skip reserves to boost projected returns are the same operators who send capital calls to their investors when a boiler fails in January.

We structure every deal with reserves specifically so we never have to make a capital call.

3. Conservative Underwriting

This one is simple in concept and difficult in practice, because every incentive in the deal-making process pushes you toward optimism.

The broker's pro forma shows you what the building "could" do. The seller's financials show you the best 12 months they have had. Your own excitement about the deal whispers that you will operate it better than the current owner.

Maybe you will. But we don't underwrite-a-multifamily-acquisition) to "maybe."

Our underwriting rules:

We underwrite to actual rents, not pro forma. If units are currently leased at $950, we underwrite to $950. Not to the $1,100 we think we can get after renovations. The renovation-renovation) upside is the return, not the basis for the acquisition price.

We use current expenses, not projected efficiencies. If the building runs at a 52% expense ratio today, we underwrite at 52%. We don't assume we will cut it to 42% and then pay a price based on that assumption.

We haircut revenue by 5-7%. Vacancy and credit loss allowance. Even in a tight market. Even if the building has been 100% occupied for three years. Because one year it won't be.

We use current cap rates for exit, not compressed ones. If the market is trading at a 7 cap today, we exit at a 7 cap. We don't assume cap rate compression to make our IRR work.

This means we pass on a lot of deals. The ones where the only way the numbers work is if everything goes right. Those aren't investments. Those are bets.

4. Debt Structuring

Debt is a tool. Used well, it amplifies returns. Used poorly, it's the single fastest way to lose a property.

Our preferences, in order:

Fixed rate. We want to know what our debt service is every month for the life of the loan. Floating rate debt in a volatile rate environment is a risk we aren't willing to take with investor capital.

Longer amortization. 30-year amortization reduces monthly debt service and improves cash flow durability. Shorter amortization might build equity faster, but it also means the deal has to perform perfectly every month to cover the higher payment.

Non-recourse when possible. This protects investors personally. If the absolute worst case happens and we lose the property, the lender's recourse is limited to the asset itself, not the personal guarantees of our investors.

DSCR above 1.25x at underwritten NOI. Not at pro forma NOI. At the conservative, stress-tested NOI we actually underwrite. This gives us a 25% cushion before debt service is at risk.

We will walk away from a deal if we can't get the debt terms we need. Cheap debt doesn't make a bad deal good. And expensive debt doesn't make a good deal bad if the fundamentals are strong. Structure matters more than rate.

5. Capital Return Priority

This is where alignment of interest becomes structural, not just a talking point.

A well-structured waterfall follows one principle: investors get their money back before anyone on our side sees upside.

The simplified version:

First: Investors receive a preferred return on their invested capital. This accrues whether or not we distribute it, so it's a real obligation, not a target.

Second: Investors receive 100% of distributions until their original capital is returned in full.

Third: Only after investors have received their preferred return AND their original capital back does the sponsor participate in profits.

This isn't the industry standard. A lot of sponsors structure deals where they earn a promote alongside investor capital return. That means if a deal underperforms, the sponsor still gets paid while investors haven't gotten their money back.

We don't do that. You get yours first. Then we get ours.

Co-Investment: Putting Our Money Next to Yours

We invest in every deal alongside our investors. Not a token amount. Meaningful capital.

Why this matters: when the sponsor has real money at risk, their decision-making changes. They're more conservative on acquisitions. More disciplined on expenses. More thoughtful about debt. Because the downside isn't just a damaged reputation. It's their own capital at risk.

If someone is asking you to invest in their deal and they have no money in it themselves, that should give you pause. Alignment of interest isn't a slide in a pitch deck. It's a check written from the same account.

What This Looks Like in Practice

Here's what gets filtered out when you apply this framework:

The "value-add" deal where the only path to returns is aggressive rent increases in a market that doesn't support them

The bridge-to-permanent loan strategy where the permanent loan isn't actually locked

The deal with 3% reserves because "we will manage it efficiently"

The pro forma that projects 8% rent growth for five consecutive years

The sponsor who takes a 2% acquisition fee, a 2% asset management fee, and a promote, and has $0 of their own capital in the deal

These aren't hypothetical examples. These are deals we have seen, evaluated, and passed on. Some of them will work out. Some of them won't. We aren't willing to make that bet with other people's money.

A Second Opinion Costs Nothing

If you're evaluating an investment opportunity, whether it's ours or someone else's, and you want a second set of eyes on the structure, we're happy to look at it.

No pitch. No obligation. Just an honest assessment of how the deal holds up under stress.

Because the best time to find out a deal doesn't survive a downturn is before you wire the money. Not after.

We talk about this every week on the Freedom Fighter Podcast. Listen on Spotify, Apple, or YouTube. Or reach out at Tanner@TopTierInvestmentFirm.com.

Tanner Sherman is the Principal and Managing Broker of Top Tier Investment Firm in Omaha, Nebraska. He co-hosts the Freedom Fighter Podcast with Ryan of Avara Investments.

Capital Preservation First: How We Structure Every Investment