@John B. First, I would check into the sponsor. Request a list of three references and call them to ask how their experience has gone. How many deals? Have they been repaid? Did the sponsor meet projections? Etc. I like the fact that the sponsor is putting up 14% of the equity, that shows a lot of confidence and alignment of interests with the investorrs. However, it is possible the sponsor is raising that money as well (using OPM) and has a much smaller piece personally. You should ask the sponsor how much he/she is putting up personally. Also, if they will be guaranteeing the loan or have anything else at risk.
I agree with @Tamiel Kenney that you should have an understanding of the market area. The sponsor should be able to provide you with a market study and/or an appraisal showing the actual rents and cap rates in the immediate market. A good appraisal will also do a write up of the largest employers, job growth, and general economy of the MSA in which the deal is located. Are the numbers getting stronger? If not, then think how this could affect the deal projections of rent growth and sales price? Are there new developments planned that will siphon off renters? Hopefully, the appraiser has researched this but you should do some research as well.
If the sponsor and market both check out, then ask the sponsor about the improvements that will allow the rent to be increased by 28% (I calculated based on Year 3 rent of $1,150/unit and your stated $250 growth) at a cost of $6,000 per door. I assume some of this cost will go to the exterior for aesthetic improvements (paint, landscaping, signage, etc) and some will go to deferred maintenance (new roof, new boiler, repairs to mechanicals, electrical or plumbing systems, site drainage, sewers, etc). So this would probably leave something substantially less than $6k per unit for the interior improvements.
Again if your sponsor has done a deal like this before and been successful, then I would put more faith in their ability to achieve the higher rents.
Finally, look at the numbers. Regarding income, 3% vacancy looks too aggressive, especially with a 28% rent increase that will require most of the units to be leased to new tenants (I find that the old tenants either can't afford the new rents or don't want to pay that much more than they currently do). What does the appraisal use as a vacancy rate? If it is much higher (5-7% which is typical) I would ask the sponsor why he used such a low vacancy. I would expect more concessions to get the units leased in a reasonable period or the vacancy should be higher. Ask the sponsor if the RUBS is existing or would be done by them and if so, what is the cost of submetering?
Looking at the expenses, I like that the taxes are increasing at a healthy rate, in line with the value increase of the property. A 40% OER in year 3 seems reasonable.
Below the line there is $13,000 annually of replacement reserves. This may be required by the lender (I assume it will be GSE debt) but in any event is good.
Sales price is at a 5.75% terminal cap rate which is aggressive in some markets but I like the fact that it is 100 bps above the going in cap rate, this is conservative and I would assume there could be some upside here if the market remains stable.
Cost of sale is low (3%, I assume this represents just broker commissions) but the additional costs (atty fees, title costs, etc) shouldn't affect returns dramatically. May be worth a question to the sponsor as to what the 3% includes.
Numbers look good (subject to the vacancy rate question and the improvements budget review). So if the market checks out and, most importantly, if the sponsor's track record is solid, I would invest.
