In both situations after 1 year you are down $1200 out of pocket...and the first situation is actually better if you take into account time value of money.Obviously a very simplistic example and there are tons of other factors involved...and lots of assumptions to be made.

You need to focus what you are getting as the LP and what are the assumptions used to get that numbers.

See whether the sponsor used conservative assumptions. 

We're under the assumption that the location is good, but something to consider if not. 

In my particular circumstances I have begun looking into the cost to convert this garage to a studio unit with the assumption that I would at least recoup those costs if we did end up selling in the near future without benefiting from the rents for a long period. 

The problem is I don't know if I'm making reasonable assumptions on the cost estimates. 

Should I move forward with this under the assumption I should be getting better rents and knowing there aren't any big expenditures around the corner (pending an inspection)? 

The other person gets the liberty of tearing your deal points and assumptions apart as well as "veto power". 

My assumption there was not a bidding war and you were the only offer?

Most of the investment types you're looking for do require some assumption of the debt of the project.