Finding the Right Deal: Why the Numbers Aren’t as Universally Conclusive as You Think

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I see a lot of articles on the blog that I coin “guts and glory.” I am guilty of it, too. You know, the low hanging fruit all about how you must have guts to succeed, and you must have a strong “why,” and all the rest of this stuff… you know what I’m talking about?

This topic is easy to write about ’cause we all agree on it in principle, which makes this the easiest advice to give and receive. Be bold, we tell. Don’t let your fears control you.

I ask people a lot about fear; I want to know what people fear. And the number one answer I get reads something like this:

The biggest issue is finding the right deal and getting comfortable enough to proceed.

Do you feel this way?

Related: Know Your Numbers: 2 Examples That Prove the Almighty Importance of Analyzing Your Investments

The way I see it, there are two separate issues blended into one here: Defining what is a good deal is one, while getting comfortable to proceed is something else all together.

What is the “Right Deal?”

Well, this is the simple part (sorta) because it’s all about the math. If the numbers work, then the deal is right – agreed?

I wouldn’t be so fast to agree!

What numbers are you using? Don’t we have to qualify this in order to make the statement above…?

For instance, I’ve been rather absent last week from the Forums. Why? I was in the running for an apartment community in Ohio. My underwriting came in at about $4.1 million, and I had reason to believe that this was good enough to get the deal done — it was certainly close…

I began talking to the investors. The underwriting penciled to 15+% IRR to the limited partner. That’s 15% IRR after all of the syndication expenses and the GP split. Great!

I didn’t get it. In the end, $4.3 million ruled the day.

Underwriting to the IRR vs. the Cap Rate

I had a candid conversation with the broker in this deal. In so many words, he asked me why I underwrite to the IRR in a marketplace where everyone else underwrites to the Cap Rate. I explained that I work with sophisticated investors who understand that Cap Rate is a static metric, and in order to inject the element of time, they want me to underwrite to the IRR. Then, they take my projected IRR (if they agree with it) and underwrite it to their MIRR, which compares apples to apples all of the opportunities available to them.

Related: The One Thing Real Estate is Really About Is …[Hint: It’s Not The Numbers]

If I try to bring my investors a deal underwritten to Cap Rate, they’ll just laugh me out of the room… 🙂

But others are comfortable doing it differently!

Sure, they are. Not everyone is as sophisticated as my investors. And not every syndicator wants to deal with sophisticated investors; most will take your money if all you know is cash on cash and Cap Rate. Many investors are less interested in driving returns and more concerned with protecting buying power. And in an environment with 10-year fixed rate GSE debt at under 5%, which is in many cases non-recourse, 12% CCR on paper looks real good.

They are comfortable; my guys are not!

You see what I mean? We all look at the same T12 numbers and market attitudes relative to Cap Rate, but these tell us a different story. One’s comfort level is a function of our capacity to read the numbers. What is good deal for them is not for me, at least not Ben Leybovich the syndicator…

I did not feel comfortable at $4.3. Am I a loser because I can’t “get comfortable?” Or am I wise for recognizing that it’s better not to take a deal than to expose and potentially lose investor money, get sued, and lose my house?

What do you think? Do you often come to a completely different conclusion than other investors on the same numbers?

Leave your comments below.

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Stephen S.

    A moderately good deal done is worth much more to me than ten Great deals which do not get done. $200,000. is about 5% of $4,100,000. Would that 5% really have been the difference between good and disastrous? If so; I am glad I do not fight in your ring.

  2. Tommy DeSalvo

    Nifty article Ben. It makes sense because even if every investor starts with the same information, the equations they choose to run, how they choose to estimate and project different things, and the weight they attach to the end results are what ultimately decides if a deal is good, bad, or great. There are a multitude of metrics different investors could use to qualify a “right” deal. Not paying above x per unit, or wanting x profit/unit/month, or a certain cap rate or IRR, etc. Every investor has a reason they value certain criteria over others, and I’m not sure which, if any, is the best or “right” way.

  3. I wholeheartedly agree that Cap Rate is a poor way to evaluate a property. I remember a realtor trying to sell me on the great cap rate of a property when I was a new, young, and inexperienced investor. I asked him to explain how it was calculated since I majored in chemistry in college and had never set foot in a business class in my life. He said “I am not sure”. The listing realtor then told me that they subtracted the expenses from the income, etc. I asked what numbers they used for each and found that they used “projected” rent with no allowance for vacancy and did not allow any expense for management. They also projected no repairs or maintenance would be needed. I laughed all the way home about them trying to pretend they knew how to analyze an investment. Any time I see a cap rate on a listing in my neck of the woods, it is a huge red flag. It means they are trying to put lipstick on a pig. I think every one of those that I declined to buy ended up in foreclosure after someone else got that “great cap rate”.

  4. Andrew Nissen

    Great article Ben but please add more info!

    I’ve read a few books that are all about getting the cap rate and NOI and arriving at a VALUE.

    TODAY the seller’s agent for a 24 unit apt building I’m looking at CHANGED HIS CAP RATE THREE TIMES while I was talking numbers with him! I couldn’t believe it. I asked how he was arriving at his cap rate and he said “well, it’s depends what you want to get per unit.” I didn’t want to drive him off but I told him it couldn’t be financed as it was offered, that got his attention and he said he would get back to me.

    I’ll research IRR more but I’d like to see/hear more regarding how you arrive at your “comfortable” number for you and your sophisticated investors. Thanks!

    • Daniel Ryu

      Hi Andrew:

      Here’s a great book that reviews IRR and other calculations. It’s easy to understand and has lots of examples and comes with spreadsheets with calculations (on his website):

      What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures by Frank Gallinelli

      And J Scott’s articles is good as well:

      Good luck with your apartment hunt. What area are you investing in?

      • Andrew Nissen

        Thanks Daniel for the tip and for asking,
        I’m looking at 4 buildings totaling 24 apartments on 1.5 ac in Columbia SC but I’ll go elsewhere if the deal is right.
        The lender at Marcus and Millichap said I’d have better luck getting access to larger sums of money (30yr Am. Fannie Mae funding) with a few years of “smaller” apartment buildings “on my resume”. My goal is 500 additional doors by 2020 performing at an average of 10%+ (and room for improvement).
        Up to this point I’ve only owned Single Family and Small Multifamily for a little more than 10 years though I have built and managed commercial properties for others. I’ll check out Mr. Gallinelli’s book and site.
        How do you do REI Mr. Ryu?

        • Daniel Ryu

          Hi Andrew..
          I’ve invested in a SFR in Jacksonville, Florida, and I’m hoping to move to MFs in the near future.
          I sent you a PM.
          Hope you enjoy the book!

          Ps. Sound like great goals!

  5. Daniel Ryu

    I’ve been thinking about fear in investing. I’ve been thinking about these two metrics to measure my own fear:

    – Things I Don’t Know But Can Know
    For example, the right entity structure to use in a Syndication. I don’t know that exactly – I kinda do, but I don’t. And that adds uncertainty to my thinking. These factors, though, I know are solvable. Talking with a good atty and asking questions here on BP will help answer these questions.

    These are fears that I can actively solve through research, connecting, and paying some money.

    Then there are these separate fears:

    – Things That Are Knowable, only to a certain degree (Predictions)
    What’s the appreciation going to be next year? What’s going to break that I don’t know about? How will the population in the city change over time? What industries might leave?

    I can research and make predictions about these events. But there’s always a certain % of doubt.

    Sometimes I confuse the two fears and think it’s my job to unequivocally know the answers to the 2nd set of fears.

    Or my mind lazily lumps all the fears together and leads to a feeling of unpreparedness.

    However, when I rationally separate out the two, I start to see things more clearly.

    There’s always a certain risk/uncertainty. Just make sure that the uncertainties I can solve, have been solved. And I’ve diminished the other risks as much as possible (or have different alternatives in those cases).

    Anyway, it’s helped!

    I, too, favor IRRs. Discounting to Present Value though always leaves me wondering – what if my investors have their money sitting in a CD making less than .5% a year? Then there’s not much in terms of better use of their money – just a question of if they’re comfortable with the risk.

  6. joseph ball

    But, if you buy “Little Deals” (house worth $40,000, distressed seller sells to me for $10,000, I sell for $25,000), you don’t have to worry about higher math.
    Jimmy Napier used to have a good way to look at it. He would just say, “That’s good enough.”
    I think, if you buy for $10,000 and sell for $25,000-$30,000, that’s “Good Enough”.
    I lost my calculator. Can you help me, Ben? I received my education from Arkansas public schools.

  7. Ian Fisher

    Ben – obviously I agree that IRR is what one needs to use for underwriting. But at the same time I would submit that this isn’t black and white: what tells you to accept $4.1 but not $4.3? Thought experiment: would you have accepted $4.101? Why or why not? Ultimately I think it depends on what the alternative uses of capital are – if it’s to sit in a bank account, I’m not sure how paying $4.3 would not have been preferable…unless you’re bombarded every day with deals that are as good as or better than the $4.1 equivalent of this deal…

    • Ben Leybovich

      Ian – the reason $4.1 and not $4.3 is because my underwriting says so…
      The reason why not $4.3 is because investors have to receive the return that they have to receive, and I want to get paid what I want to get paid. At $4.1 everyone is happy. At $4.3 – the investors will get what they need, but I’ll get less – get it? I don’t work for less…

      The deal is either there, or it’s not. Nobody wants me to propose 9% IRR – everyone wants 15%. And that’s after I take out my pay. If there’s no pay for me, I don’t play – unless investors start asking for 9% IRR…

      • Ian Fisher

        Of course when the numbers are that stark it’s easy to make the case. But my point is just that this isn’t black and white but rather many shades of grey – and definitely depends on what the alternative uses of capital are. So you tell me – if I take your response above and substitute $4.101 for $4.3, and 14.9% for 15%, would you do the deal? Or would you prefer to keep the investors’ capital unused and earning zero, and no pay for you?

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