What makes a "good" deal?

Since founding my company, I’ve invested in over $150 million of real estate, bringing us close to 500 doors in our portfolio. It’s been a ride—more ups than downs, I’d like to think. But let’s be honest: anyone who invested pre-2023 has some bruises.

Through the wins and losses, I’ve developed a clear framework for what makes a “good deal”. I’ve always believed in conservative underwriting as a core pillar to protecting yourself and your investors. But what is conservative?

Lessons from the Past

In 2021, "conservative" meant underwriting exit cap rates with a 5-handle. At the time, it felt cautious—everything was trading in the low 4s, and the 10-year Treasury sat below 1%. Hindsight says otherwise.

Expenses? Same story. Most buildings operate with a 35-40% expense ratio, but projecting future expenses can be a guessing game. Insurance, labor, utilities, taxes—up and to the right. Few of us saw this coming.

A mentor once told me he didn’t bother with annual property budgets because “the building will do what it’s going to do, and what's the budget going to do about that.”That’s extreme, but there’s truth to it: projections offer comfort, not certainty. We are, all of us, engaged in the noble task of trying to bring a semblance of "control" to an inherently chaotic process.

As the saying goes, "Man plans, and God laughs."

But you can try to build a framework to ensure a better outcome, if you plan to invest.

The Pillars of Conservative Underwriting

Here’s what I’ve learned generally helps avoid huge mistakes:

1. Exit Cap Rate Discipline: Always assume a worse cap rate at exit than at acquisition. Not perfect, but better than assuming flat or lower rates.
2. Expense Growth > Income Growth: Assume expenses will outpace income. It’s painful when they do—but this safeguard matters.
3. Avoid Overestimating Rent Increases: Lenders in Seattle and Portland forced us to stay conservative on rent growth. Some sponsors in hotter markets (Arizona, Texas) may not have had that governor.
4. Know Your Market for Value-Add: Understand the dynamics for your unit type. We’ve targeted 40% rent premiums on renovated units—and hit the mark consistently.
5. Debt Discipline: Use leverage carefully. We took some 3-year bridge loans and got out clean, but it was a lesson. Some deals I avoided—by as little as $100k—could have been disasters. Sometimes luck helps.
6. Raise Contingency Capital: Cost overruns happen. Labor and materials skyrocketed for us, but we planned for it.
7. Stress Test Everything: What happens at higher vacancies? Spiking delinquencies? A 9-cap exit? If your investors can still break even under extreme assumptions, that’s a strong deal.

The Real Litmus Test: Day-One Cash Flow

In my experience, the best-performing deals share one trait: they cash flow from day one, and they cash flow well. This isn't just my perspective - I had a good friend and mentor say the same thing. He's invested in a ton of deals - he said the number one factor differentiating the top performers from the rest were those that came, out the gate, swinging with positive and healthy cash flow.

I’ve never done a deal that started with negative cash flow—and I think that’s key. Deals that cover debt service from the start, under conservative assumptions, are inherently more stable. Just to be clear - I'm not saying every property we've bought actually cash flowed out the gate.

What I mean is to avoid a purpose built deal where you enter it with assumed negative cash flow for quite awhile while you work your plan.

Distressed or deep value-add deals might break this rule if you have a clear path to profitability (e.g., 80% vacant with a turnaround plan). But buying a building where in-place rents won’t cover the mortgage until you “execute the plan”? That’s a risk I’d question.

Today’s Market: The Opportunity

The good news? Deals with strong cash flow profiles on day one are out there—even with higher interest rates. We’re seeing them now, and for disciplined investors, it’s a great time to find opportunities that fit a true conservative model.

If you're interested in learning more about identifying conservative deals or howe we apply this framework in our acquisitions, DM me - I'd love to share more.