Most passive investors spend significant time evaluating cap rates, markets, rents, and debt terms. All of these matter, of course. But there is one risk factor that quietly determines whether a multifamily investment delivers…or disappoints:
Operational Risk.
At its core, operational risk is the potential for financial loss due to failures in internal processes, systems, or day-to-day execution. In multifamily, that translates directly to the sponsor’s ability to operate the asset well.
You can buy the right property, in the right market, at the right price.
However, if the team running it cannot execute, the deal will struggle.
What Drives Operational Risk?
It comes down to the sponsor’s experience and the strength of their operating infrastructure. Key areas include:
- The ability to manage the property manager, including accountability and performance oversight
- Effective leasing and marketing, especially in soft or competitive markets
- Maintenance systems and responsiveness
- Construction and renovation management (budgeting, timelines, change orders)
- Hiring, training, and retaining on-site personnel
- Consistency in executing business plans with discipline
- The presence (or absence) of documented processes, KPIs, and controls
In short: Operations are where the business plan becomes real.
Mitigating Operational Risk
As passive investors, we cannot control operations, but we can evaluate them thoughtfully. A few best practices:
- Assess the operator’s track record. How have they performed in past deals? Have they navigated tough moments with transparency and discipline?
- Understand their operating model. Are they vertically integrated, or do they outsource property management? Both can work, but each deserves scrutiny.
- Evaluate partner alignment. If a third-party manager is used, how long have they worked together? What is their communication rhythm? What KPIs are reviewed and how often?
- Ask about lessons learned. Operators who openly discuss past mistakes tend to run better, tighter ships.
Operational risk is not glamorous, but it is absolutely pivotal. When operations are strong, even a challenging market can be navigated. When operations are weak, even a great acquisition can falter. Underwriting is the risk assessment and roadmap and operations is where the rubber meets the road.
If you want to be a more confident passive investor or capital partner, start by evaluating not just the deal, but the team behind the deal.
Vessi Kapoulian
Breaking down multifamily underwriting one step at a time to create educated and empowered investors