Alternative Investment Due Diligence Checklist: 20 Questions to Ask

Due diligence on alternative investments separates informed investors from hopeful ones. Before wiring money to any platform or sponsor, run through these 20 questions. Each one has tripped up real investors who skipped it. Print this list, open the offering documents, and check every box.

Platform-Level Due Diligence

These first questions evaluate the platform itself — the company connecting you to investment opportunities.

Question 1: Is the platform registered with the SEC or FINRA?

Check SEC EDGAR for offering filings and FINRA BrokerCheck for broker-dealer registration. A platform like Fundrise files Reg A+ offerings with the SEC, providing a layer of regulatory oversight. Unregistered platforms operating outside any regulatory framework should be avoided entirely.

Question 2: How long has the platform been operating?

Track record matters, but context matters more. A platform that launched in 2019 has survived COVID, a rate-hiking cycle, and commercial real estate stress. One that launched in 2024 during recovery conditions hasn't been tested. Due diligence on alternative investments requires understanding what market conditions shaped a platform's results.

Question 3: What is the platform's realized track record?

Demand completed deal data — not projected returns on active investments. Ask: how many deals have fully exited? What was the average net IRR? What was the loss rate? If a platform has 100 active deals but only 5 exits, the "track record" is mostly theoretical.

Question 4: Who are the key people running the platform?

Research the founders and senior leadership on LinkedIn, court record databases, and SEC enforcement actions. Look for relevant industry experience — real estate, asset management, financial services. A team of software engineers with no investment experience running a real estate platform is a concern.

Question 5: How are investor funds held?

Your money should sit in a separate legal entity — an SPV, trust, or custodial account — not the platform's operating account. Ask who the third-party custodian is and verify they exist. This single question could save your entire investment if the platform fails. See our guide on Red Flags in Alternative Investment Platforms for more on fund separation.

Deal-Level Due Diligence

These questions evaluate specific investment offerings on the platform.

Question 6: What legal entity am I investing in?

You should receive a clear answer: "You're purchasing membership interests in XYZ Apartments LLC, a Delaware limited liability company." If the answer is vague or the entity can't be identified in state corporate records, don't invest.

Question 7: What does the PPM or offering circular say about fees?

List every fee: management, acquisition, disposition, performance, property management, construction management, refinancing, and operating expenses. Add them up over the expected hold period. Due diligence on alternative investments demands that you know your total cost, not just the headline fee.

Question 8: What is the distribution waterfall?

Understand who gets paid first and how profits are split. Key terms: preferred return (your minimum before the sponsor earns carry), catch-up (the sponsor's accelerated recovery), and promote split (how remaining profits divide). Model the waterfall at 6%, 10%, and 15% gross returns to see your net take at each level.

Question 9: Is the sponsor co-investing?

A sponsor putting their own capital at risk alongside yours demonstrates alignment. Ask for the dollar amount — not just the percentage. A $100,000 co-investment in a $50 million raise is 0.2%, which isn't meaningful alignment. A $1 million co-investment is more convincing.

Question 10: What is the business plan and timeline?

For real estate: what's the strategy (core, value-add, opportunistic, development)? What specific improvements or changes will drive returns? What's the projected hold period? For private credit: what's the loan-to-value ratio, borrower profile, and expected duration? Vague strategies like "we'll buy good deals" aren't business plans.

Risk Assessment Questions

Question 11: What are the specific risks of this deal?

Go beyond generic market risk. Ask: What happens if occupancy drops 20%? What if interest rates rise another 200 basis points? What if the renovation costs 40% more than projected? The PPM lists risks, but the sponsor should be able to discuss them candidly.

Question 12: What is the leverage ratio?

A property purchased for $20 million with $15 million in debt has 75% leverage. Higher leverage amplifies returns in good times and losses in bad times. Deals above 70% LTV carry meaningful refinancing risk if property values decline. Due diligence on alternative investments requires understanding how debt magnifies both outcomes.

Question 13: What happens if I need my money back early?

Most alternative investments have no liquidity for 3–10 years. Ask specifically: Is there a redemption program? What are the penalties? Is there a secondary market? What's the realistic timeline to exit? If you might need this capital within the hold period, don't invest it.

Question 14: What happens if the sponsor or platform ceases operations?

The operating agreement should address successor management and wind-down procedures. Platforms like Fundrise and AcreTrader have addressed this in their fund structures. If the documents don't cover this scenario, that's a gap in your protection.

Question 15: Has the sponsor or platform faced any legal or regulatory actions?

Search SEC enforcement actions, FINRA disciplinary records, and state court records. A single resolved complaint isn't necessarily disqualifying. A pattern of investor lawsuits or regulatory sanctions is.

Financial Verification Questions

Question 16: Are the financial projections realistic?

Compare the sponsor's assumptions against market data. If they project 4% annual rent growth and the market averaged 2% over the past decade, ask why their deal will outperform. If cap rate assumptions imply the market will compress beyond historical norms, challenge it.

Question 17: Has the sponsor's prior fund performance been audited?

Audited returns verified by an independent accounting firm carry far more weight than self-reported numbers. Any sponsor managing over $25 million should have audited financials. If they don't, ask why.

Question 18: What are the tax implications?

Will you receive a K-1 or 1099? Is the investment eligible for depreciation pass-through? Are there state tax filing requirements? Due diligence on alternative investments must include tax analysis — a 10% return that triggers tax filings in five states costs more than you think.

Question 19: How does this investment fit your overall portfolio?

Alternative investments should complement your public market portfolio, not duplicate it. If you already own a REIT index fund and your home, adding more real estate may increase concentration risk rather than diversification. Honest due diligence includes the hard question of whether you need this deal at all.

Question 20: Can you afford to lose this entire investment?

Alternative investments can go to zero. The sponsor can mismanage the property, the market can crash, or the platform can fail. If losing this capital would affect your retirement, emergency fund, or financial stability, the investment isn't appropriate regardless of the projected returns.

How to Use This Checklist

Score each question on a simple scale: green (satisfactory), yellow (needs more information), or red (unacceptable). Invest only when you have no reds and no more than three yellows.

For additional evaluation frameworks, see our guide on How to Evaluate an Alternative Investment Platform. Combine this checklist with the red flag analysis in our Red Flags in Alternative Investment Platforms article for comprehensive coverage.

Frequently Asked Questions

How long should due diligence take for an alternative investment?

Plan 4–8 hours for a thorough review of a single deal: 2–3 hours reading the PPM, 1–2 hours researching the sponsor and platform, and 1–2 hours modeling financials and comparing assumptions. Due diligence on alternative investments is time-intensive because the information isn't standardized the way public company filings are. Rushing it is how investors miss critical details.

Is platform due diligence enough, or do I need to evaluate each deal?

Both. Platform-level due diligence (questions 1–5) can be done once per platform and updated annually. Deal-level due diligence (questions 6–20) must be repeated for every individual investment. A great platform can still host a bad deal, and a questionable platform might occasionally offer a solid one. Evaluate both layers.

What if the platform won't answer my questions?

That's a red flag. Legitimate platforms have investor relations teams trained to answer due diligence questions. If a platform refuses to provide its track record, fee details, or legal documentation, move on. There are enough platforms competing for your capital that you never need to invest where transparency is lacking.

Should I hire a professional for due diligence?

For investments over $100,000, consider hiring a securities attorney ($500–$1,500) to review legal documents and a CPA familiar with alternative investments to assess tax implications. For smaller investments, self-directed due diligence using this checklist is practical and sufficient for most investors.

How often should I re-evaluate platforms I'm already invested in?

Review annually at minimum. Check for management changes, regulatory actions, shifts in fee structures, and performance relative to projections. Download all account documents and statements — don't rely solely on the platform to store your records. If you notice deteriorating communication or missed distribution dates, escalate your monitoring.

What's the most commonly skipped due diligence step?

Verifying realized track record. Most investors accept the returns advertised on the platform's homepage without asking how many deals have actually completed and what those investors actually received. Projected returns on active deals tell you nothing about the sponsor's ability to execute. Always demand completed deal data.

ModernAlts is an independent research platform. Nothing in this article constitutes investment, legal, or tax advice. Alternative investments involve risk including possible loss of principal.