How to Stress Test CRE Projections So You Don’t Get Burned

On paper, every deal looks like a winner—until reality hits.

If you’ve ever reviewed a commercial real estate (CRE) pitch deck, you’ve seen the same glowing numbers: 18% IRR, 8% cash-on-cash return, and an “attractive” 2x equity multiple in just five years. It’s hard not to be tempted. But as seasoned investors know, projections are just that—projections. And relying solely on optimistic pro formas can be the fastest way to get burned.

In the world of passive real estate investing, one of the most critical yet overlooked skills is learning how to stress test a deal. While you may not be operating the property yourself, your capital is still at risk. And if you want to preserve and grow that capital over time, you can’t afford to take the sponsor’s numbers at face value.

That’s where stress-testing comes in.

This blog will walk you through the mindset, techniques, and real-world metrics you can use to evaluate whether a deal holds up when things don’t go as planned. We’ll show you how experienced limited partners (LPs) break down assumptions, test the limits of a deal’s performance, and make investment decisions based on realistic—not rosy—scenarios.

Because here’s the truth: markets shift, expenses rise, tenants leave, and financing gets tighter. And when that happens, the deal you thought would double your money might just return your principal—if you’re lucky.

By the end of this post, you’ll know how to:

Identify the most common areas where projections go wrong
Ask the right questions to sponsors about downside scenarios
Use simple tools to run stress tests—even if you’re not a spreadsheet wizard
Evaluate whether a deal is built to survive turbulence or only thrive in perfect conditions

This isn’t about fear—it’s about fortifying your investing approach. The best LPs are prepared, informed, and calm when markets wobble. And that preparation starts before the check is written.

So let’s dive in—and learn how to stress-test like a pro, so you never get caught off guard when the market delivers a curveball.

Why projections are never perfect

It’s important to understand that projections—no matter how sophisticated—are built on a series of assumptions. And the further those assumptions stretch into the future, the more fragile they become.

Most pitch decks are designed to highlight potential upside. That’s not inherently wrong—after all, real estate is a business built on opportunity. But it becomes dangerous when LPs confuse optimistic scenarios with probable outcomes.

Here are some common ways projections miss the mark:

1. Overly Aggressive Rent Growth Assumptions

Sponsors often forecast annual rent increases of 3–5% or more. But in many submarkets, actual rent growth averages closer to 1–2%—especially when adjusted for tenant turnover and concessions. One down year in the market can wipe out multiple years of projected growth.

2. Underestimating Expenses

Operating expenses—especially in older buildings—rarely stay flat. Line items like insurance, taxes, and repairs often increase faster than expected. And some sponsors don’t include reserves for major capital expenditures, assuming they’ll refinance or sell before big-ticket items hit.

3. Cap Rate Compression at Exit

Another red flag is assuming the property will be sold at a lower cap rate than it was bought. That’s betting on market sentiment to improve in the future. If the exit cap rate is actually higher—say due to interest rate hikes or a softening market—your projected sale price could drop by hundreds of thousands of dollars.

4. Unrealistic Lease-Up or Renovation Timelines

Plans to renovate, re-lease, or reposition assets rarely go perfectly. A 12-month lease-up could turn into 18 months. Permits can get delayed. Contractors run behind schedule. Every month of delay eats into your returns.

5. Overreliance on Cheap Financing

Many deals are underwritten with bridge debt or variable-rate loans assuming low interest rates. But if the financing climate changes—and your DSCR (debt service coverage ratio) drops—refinancing may become much more expensive or even unviable.

The bottom line? Any single assumption going off-course may not sink a deal. But several combined can quickly erode your returns.

This is why experienced LPs never take the “summary returns” slide at face value. They dig deeper. They ask tough questions. And they evaluate what happens if things go not quite as planned.

In the next section, we’ll cover how to adopt the stress-test mindset and why it’s one of the most valuable habits you can build as a passive CRE investor.

The stress Test Mindset

The best limited partners know that risk isn't eliminated in real estate—it's managed. And managing risk starts with thinking in downside scenarios, not just upside potential.

The stress-test mindset means shifting your perspective from “How much can I make?” to “What could go wrong, and can the deal survive it?” It’s about planning for rain—even while hoping for sunshine.

Here’s why this mindset matters:

1. Optimism Sells, But Resilience Wins

Most sponsors present an ideal scenario in their investor materials—and understandably so. They’re raising capital and need to paint a compelling picture. But as an LP, your job is different. You’re not selling the deal. You’re protecting your capital.

Your role is to play devil’s advocate. Ask: If vacancy spikes? If rents drop? If interest rates rise? What happens to the returns then?

2. Margin for Error Is Your Best Friend

A great deal isn’t one that hits a perfect plan—it’s one that still performs when the plan goes sideways. The more cushion a deal has—through low leverage, conservative underwriting, or high break-even occupancy—the safer your investment is.

Think of it like a pilot flying a plane. You want extra fuel in case of turbulence, not just enough for a straight shot.

3. Stress-Testing is a Skill You Can Learn

You don’t need to be a full-time underwriter or Excel wizard to develop this muscle. With a few key metrics, a basic spreadsheet, or the ability to ask the right questions, you can assess how fragile or resilient a deal really is.

4. Confidence Comes from Preparation

Once you’ve stress-tested a deal, you’ll feel more confident in your decision—whether that’s to invest or walk away. You’re no longer relying on someone else’s narrative. You’ve seen the numbers from multiple angles.

And when markets do shift—and they will—you’ll sleep better at night knowing you chose a deal built to handle it.

In the next section, we’ll break down the five most critical assumptions to test in any CRE investment so you can apply this mindset practically and protect your downside like a pro.

The five key projections to stress Test

Not all numbers in a pro forma carry equal weight. Some line items—like rent growth or exit cap rate—can dramatically swing your investment outcome if they miss the mark. Here are the five most important projections you need to pressure test:

1. Rent Growth Assumptions

Ask: What’s the assumed annual rent increase, and is it supported by historical data? If the pro forma shows 4–5% annual growth, test the model using only 1–2% growth—or even flat rents for the first 1–2 years.

Why it matters: Rent growth drives top-line revenue. If the market slows or if new supply increases competition, overestimated rents can mean a 20–30% shortfall in income projections.

2. Vacancy and Lease-Up Timeline

Ask: How long is the assumed lease-up or turnover period? What occupancy rate is needed for breakeven cash flow?

Stress Test: Add 6–12 months to the lease-up period or increase vacancy by 5–10% and see how it affects the cash flow.

Why it matters: Each month of delayed occupancy means zero revenue and continued expenses. In newer leases, you may also need to factor in tenant improvement costs or rent concessions.

3. Exit Cap Rate

Ask: What is the cap rate used for the projected sale, and how does it compare to today's market?

Stress Test: Increase the exit cap rate by 50 to 100 basis points (e.g., from 5.5% to 6.5%) and see how much the sale price drops.

Why it matters: A seemingly small change in cap rate can slash millions from the projected sale price. Conservative investors assume cap rate expansion, not compression.

4. Operating Expenses

Ask: Are the expense ratios in line with industry standards? Have taxes been re-assessed post-acquisition?

Stress Test: Increase operating expenses by 10–15%. Also, test the model with higher-than-expected insurance or utility costs.

Why it matters: Many sponsors underestimate expenses. If they rise faster than revenue—or if reserves are too thin—your preferred return could disappear quickly.

5. Financing and Refinance Assumptions

Ask: What is the assumed interest rate on acquisition and refi? What’s the timeline and DSCR at exit?

Stress Test: Model the deal with a 100–200 bps increase in interest rates. Push the refi out 1–2 years later than planned.

Why it matters: In a rising rate environment, lenders may not offer the same terms down the line. If the property can’t refinance profitably, distributions may be delayed—or worse, additional capital might be needed.

tools and approaches to run the stress test

You don’t need Wall Street-level analytics software to pressure test a deal. In fact, most of what you need can be done with a simple spreadsheet and a thoughtful set of questions.

1. Start with the Sponsor’s Model

Most sponsors will provide a financial model with assumptions and projected financial statements. Start by identifying the key variables—rent growth, expenses, cap rate, occupancy, interest rates.

Ask the sponsor: “Can you share a copy of the Excel underwriting model?” If not, see if they’ll walk you through the numbers on a call. Transparency is a green flag.

2. Use a Simple Sensitivity Table

Set up a basic Excel table to change one variable at a time:

Rent growth from 5% → 2% → 0%
Exit cap rate from 5% → 5.5% → 6%
Expense growth from 2% → 4% → 6%

This lets you see how your returns move under different conditions.

3. Build a Scenario Matrix

Take it one step further by layering multiple assumptions:

Base Case: As underwritten
Moderate Stress: Lower rent, higher vacancy, slightly higher exit cap
Severe Stress: Flat rents, delayed lease-up, cap rate expansion, higher expenses

Compare the IRR and equity multiple in each scenario. If the deal only works in the base case, it’s not built to weather disruption.

4. Use Online Tools if You Don’t Excel

If spreadsheets aren’t your strength, use the spreadsheets available on this website or even tools within the CRE Accelerator can help you plug in variables and visualize downside scenarios.

5. Talk to a Pro

If you’re still uncertain, share the deal with a coach, mentor, or fellow LP. Fresh eyes might spot issues you’ve missed. In communities like CRE Accelerator, members regularly review deals together and help run stress scenarios.

Next, we’ll dive into the red flags and green flags that signal whether a deal can withstand the real world—or whether it’s too fragile to trust.

Green flags vs. red flags in stress testing

Once you've run the numbers, the results will tell a story. Some deals demonstrate durability—others unravel quickly under even light pressure. Use this section to identify what solid fundamentals look like—and what should send you running.

Green Flags (Things to Look For)

Sponsor Provides Downside Scenarios: A quality sponsor anticipates questions and includes both base and downside case projections in their investor materials. This shows they understand market cycles and are building in buffers.
Conservative Underwriting: The rent growth, exit cap rate, and expense projections are grounded in historical data—not hopeful leaps. Ideally, there's a sensitivity analysis already baked into the financial model.
Healthy Debt Service Coverage Ratio (DSCR): A DSCR of 1.25x or higher—even under conservative assumptions—is a good sign. This means the deal can support its debt even if income dips slightly.
Built-In Contingency Reserves: Smart operators allocate capital for unexpected repairs, delays, or cost overruns. They don’t just hope everything goes to plan—they prepare for when it doesn’t.
Break-Even Occupancy Below 80%: If a property can remain cash-flow positive with 75–80% occupancy, it’s generally safer. Anything over 85% is a red flag.

Red Flags (Warning Signs to Investigate Further)

IRR Drops Sharply with Minor Changes: If just a 1% increase in cap rate or a 5% bump in expenses causes returns to collapse, the deal is likely too fragile.
Unrealistically Low Expense Ratios: If expenses are significantly lower than market averages (e.g., 25% for a property that should be at 40%), assume something is missing or underestimated.
High Leverage with Interest-Only Periods: If the sponsor is relying heavily on interest-only debt to make the numbers work, you’re exposed when the loan converts to amortizing payments.
Exit Strategy Depends on Market Timing: If the business plan is to “sell in year 5 at a 4.5% cap,” ask what happens if cap rates rise. A good deal shouldn't require perfect timing to exit successfully.
Lack of Transparency or Pushback on Questions: If the sponsor avoids stress-testing questions, deflects, or fails to provide requested data, that’s a major red flag. Transparency builds trust. Evasion signals risk.

Next, we’ll walk through how to use these stress-test results to actually make confident investment decisions—whether to say yes, negotiate terms, or pass entirely.

how to use stress test results to make a decision

Running a stress test is only part of the equation. The true value comes from knowing how to interpret the results and decide what to do with them. Do you move forward? Negotiate better terms? Or pass altogether?

Here’s how experienced LPs make sense of the data:

1. Recalibrate Expectations

Sometimes a deal still makes sense—even with compressed returns. If your original goal was a 16% IRR but the deal still projects 12% under conservative scenarios, that may still be worth doing depending on your risk profile and alternative options.

Ask yourself: “If I earn 60–70% of what was projected, would I still be happy with this investment?”

2. Use Results to Ask Better Questions

The stress test often uncovers variables you hadn’t considered. This is your opportunity to go back to the sponsor with more informed questions:

What’s your break-even occupancy?
How sensitive is the business plan to interest rate fluctuations?
What happens if the lease-up is delayed by 6 months?

The more specific your questions, the clearer the sponsor’s thinking will become—and that alone can build (or erode) confidence.

3. Understand Your Personal Risk Profile

A deal might hold up under moderate stress, but still feel too aggressive for your comfort level. That’s okay. You’re not trying to win a prize for highest return—you’re trying to build durable wealth.

Use the stress test to confirm whether this deal matches your:

Time horizon
Need for cash flow vs. appreciation
Willingness to accept risk in return for potential upside

4. Reassess the Sponsor Relationship

If the sponsor refuses to provide additional data or brushes off your questions, that tells you something more valuable than numbers ever could: they may not be the partner you want to trust with your capital.

On the flip side, if the sponsor embraces your diligence, provides helpful responses, and even shares their own stress scenarios, that’s a green flag in itself.

5. Be Willing to Walk Away

Finally, if the deal doesn’t hold up—or if it only works when everything goes perfectly—it’s okay to pass. Great investors say “no” more often than “yes.” Your job isn’t to find the most deals. It’s to find the right ones.

When in doubt, remember: capital preserved is capital that can be redeployed into better opportunities.

In the final section, we’ll tie this all together with a mindset shift that separates the passive investor from the passive-minded investor—and why this discipline sets the foundation for long-term success.

Final Thoughts

Every passive investor loves a clean pitch deck with high returns and sleek visuals. But what separates seasoned LPs from the crowd isn’t enthusiasm—it’s discipline.

Stress-testing is that discipline.

It’s the quiet, behind-the-scenes work that transforms you from someone chasing projections into someone managing risk. It’s the habit that keeps your capital intact when the market turns. And it’s what gives you the confidence to say “yes” to the right deals—and just as importantly, “no” to the wrong ones.

Because in this game, survival is success. And stress-testing is your seatbelt.

Remember: projections are not promises. They're guesses—educated ones, hopefully—but guesses nonetheless. Your job as a limited partner is to pressure test those guesses and ask, “What if this doesn’t go as planned?”

And when you develop the habit of doing that consistently, you’ll find yourself more confident, more selective, and more successful in every deal you evaluate.

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