Why You MUST Buy Below Intrinsic Value for Solid Real Estate Returns

by | BiggerPockets.com

I am not particularly known around here as a proponent of serious discourse.

Having said this, what the hell? Let’s try it. 🙂

If you listened to BiggerPockets Podcast 152, I am sure you came away having formulated several conclusions. One of those conclusions, I am sure, was that next to Serge Shukhat and Brian Burke, Ben Leybovich is certainly the best looking, most able to express himself eloquently, and most genteel.

I see you nodding your head. Good. Glad we got that out of the way.

I’ve had a couple of folks reach out to me for clarification of something that was said in that podcast. Why must you buy below intrinsic value?

About the only thing the three of us, meaning Serge, Brian, and myself, agree upon, besides me having no talent, is that in order to succeed in this business, you must buy property below intrinsic value and buy with a value-add component. Let’s talk about this.

Let me ask you a few questions:

Question: Why do you think it is so important to us to buy below intrinsic value?

Answer: It’s not because we are cheap. All three of us will spend big money for quality, so long as it is below intrinsic value and there is value add. The strategy that allows us to achieve outsized returns revolves around taking assets from below intrinsic value toward their intrinsic value. It is in this delta that we make money.

It is this delta that allows us to exit our capital via sale or cash-out refinance, thereby completing the cash flow cycle via taking original investment capital off the table, which drives our IRR. But this is very much a function of buying below intrinsic value.

Let’s say you buy a C-class building at retail, which is what all of us are telling you NOT to do. But let’s say that you do it.

Question: What happens to your C-class once someone puts up a brand new A-class building half of a mile down the road?

Answer: Assets don’t live in a vacuum, and the reason your asset is currently deemed as C-class is because that’s where it stacks up against the newer and better B-class buildings in your marketplace, as well as the really spiffy seven-year-old A-class ones.

Related: 9 Low-Cost Ways to Dramatically Increase the Value of Your Rental Property

Well, now that a brand new A-class went up, what used to be A-class suddenly becomes B-class, and what used to be B-class suddenly becomes C-class. And your C-class — that’s now crap that nobody wants to live in.

So How Do You Guard Against This?

Simple: You have to buy this C-lass as though it is D-class. In other words, you have to buy this asset (or any other) at a discount — buy it below intrinsic value. And then you have to do what you need to do in order to make your C-class building, which you bought as though it was a D-class, competitive with the current B-class, which will become the new C-class as soon as that new A-class goes online.

I know that’s a mouthful, but that is how this works.

The only other thing left to mention here is that aside for buying below intrinsic value, you must buy value-add, since being able to force the competitiveness of any asset is a function of value add.

Related: The Investor’s Detailed Guide to the Financial Benefits of Rental Property (Real Numbers Included!)


Buying anything at intrinsic value is the “buy and pray” model, whereby the investor hopes that the market will take care of them.

Don’t do that!

Naturally, this rules out the turnkey model. Furthermore, unless you are dealing with a very reputable and very professional PM with thousands of units in their portfolio, which you won’t be unless you are buying 100+ doors, then property management is also ruled out, since managers typically won’t handle value add as well as you need them to.

So if you are going to be an investor, then get dirty, and good luck! But, if you are going to pretend that buying RE investments is just like buy mutual funds, whereby the entire road to success will be handled for you, just say no!

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 JustAskBenWhy.com.


  1. Curt Smith

    HI Ben, I agree! If one has gone to commercial property boot camps all if not most teachers will espouse the 10/20 rule. Or some ratio. buy at X cap rate only when the property has enough low cost value adds to bump the cap rate to twice the purchase cap rate.

    This gets into the efficiency of dollars added after purchase to obtain the doubling of the cap rate, so not all deals that can double are equal.

    Buying under value: You didn’t give examples Ben? 🙂 I’m cheap too so I want to pay a few percent less cap rate for a deal than the going.

    • Ben Leybovich

      Yes. In other words, there is such thing as Cap Rate of the value add component. That gets blended with the acquisition Cap Rate to produce the transaction Cap Rate. The IRR requires us to look at the Cap Rate required to exit the money, and then work backwards, which is a function of this blended Cap.

      And Curt – Shukhat is cheap; you are normal 🙂

  2. David Roberts

    It sounds like what you are saying, to put it another way, is paying retail price or at intrinsic value is to essentially relinquish control to the market. Because, now you must rely on the market to do the dirty work, versus you buying a foreclosure at 50% ARV, spending 20% on it, and essentially earning an additional 30% in equity, then cashing out.

  3. Bill Gulley

    Intrinsic value, the perceived value that cannot be measured in the market based on opinions. The view of the ocean or lake may be beautiful to some, more beautiful to others, others may be willing to pay more for the view.

    Market value may be influenced by intrinsic values that can be measured in the market. A property located in Golden Grape subdivision may sell for more than an identical home built by the same guy located in Moldy Forrest Hills subdivision.

    As Ben mentions, we don’t want to pay more for intrinsic values that can’t be shown in the market as you’ll pay more and may not recoup the difference to market.

    Not once did Ben say buy under market value! Very good information Ben. Change the perception you can change the value! 🙂

  4. Nick B.

    Ben, I am all for buying below intrinsic value but how do you quantify it? Also, how do you convince the seller to sell below intrinsic value provided that the seller is not stupid?
    And just to clarify, I mean a large 100+ units property where sellers are supposed to be sophisticated.


    • Ben Leybovich

      Well, one way Serge mentioned is cost approach. In other words, if it costs $100/sq.ft to bring new product to the market, then that is what defines A Class. You discount everything starting with this base-line. Now, what you discount things to is a long conversation, involving factual as well as perceived realities in the marketplace, as Bill mentions in his comment above…

      In some ways, this is all a judgement call. Commercial space is at once the most reasonable, and the least reasonable place to play the game. You need to understand the thoughts and psychology underpinning those thoughts in the marketplace 🙂

  5. Chris Clothier

    Ben –

    I love your articles and your comments on the forums, but, in my understanding, I think you are using the terms in this article incorrectly.

    What you are looking for as other posters have commented is true value of a property. Intrinsic value is the value of the whole property and in the case of a turnkey property, includes all of the value added services. Intrinsic value implies the value of the whole and does not necessarily mean the true market value of the property. It can include both tangible and intangible value that an investor gets and again, may not be the same as the market value. So intrinsic value is what a passive investor gets from a process of using a property manager or using a turnkey provider or even building their own team to invest. The intrinsic value is the value they get from others – the value add of leveraging other peoples time – while you use your own time to make money in the highest and best use form that you can.

    Your point about buying below market value and buying properties where you can take steps to add to the over-all value of the property are spot-on and well-taken…..for active investors.

    You note at the end of your article that passive investors need not get involved in real estate if they want to have success – at least as you define value. I would argue that is a fairly narrow view, and would exclude the VAST majority of real estate investors today. Just because an investor does not get their hands dirty, does not mean they cannot turn a profit, earn a nice return and take advantage of the intrinsic value you can get from investing in real estate!

    As always, thanks for taking the time to write the article and leading me off the sidelines to leave a comment! All the best to you –

    • Ben Leybovich

      Chris – thanks indeed for jumping in. Let’s talk…

      To me, safety in any transaction, is paramount, and it is a function of the exit. In other words – I want to be able to exit at any time, if need be. This is safety.

      The price-point in the marketplace which allows an exit is in my thinking the intrinsic value. If, for example, the cap rate for this type/age/amenity package property in this location is 7.5%, then I do not want to plan on exiting at a lower cap than that. In fact, I’ll likely discount that cap by 15%-20% to underscore my exit/intrinsic value. And, if I’ve bought sufficient delta to be able to perform this exit and still make money, than I am good… This is why I underwrite to the IRR.

      Now – I’ve seen many. many posts on bigger pockets which state that TK purchase should not be expected to be exited out of any time soon, and that in fact TK is a long-term investment.

      The reason this rationale keeps coming back, Chris, is to justify the fact that the delta between purchase price and intrinsic value in most TK deals is $0, and some time a negative number. This necessitates that in order to wait, people have to wait for organic appreciation. And the reality is that in most parts of the country, in most asset classes that are traded as TK, this will likely not be any more than inflation, thereby the investor is not really creating value, outside of CF.

      CF, as we all know, is here today, and gone tomorrow, specifically in C Class.

      Chris – to your concern that my thinking would exclude vast majority of people from investing in RE. Yes – it would. You are a pro, and so am I. And that’s what it takes, in my opinion, to stay in this game long-term…

      Always appreciate your in-put, Chris. Though, relative to TK, I rather don’t think you and I will ever bridge the gap…

      • Chris Clothier

        I think I keep coming back to the word intrinsic when I am reading your article, my comments and your response. I think it boils down to using the same word differently.

        I completely agree with and understand your point – i think – because the way i understand it is this. If you are not buying below market value -and substantially below market value – where you have the opportunity to add some form of improvement or value, then you are going to have trouble making money in real estate. In your argument, the intrinsic value IS the delta which allows you to make money by multiple exits at any point because you purchased properly. Did I get that correct?

        I define the intrinsic value in a more broad manner. I view intrinsic value as that value which any investor finds in a deal that may be valuable to them and their particular situation and possibly not to others. Many investors may find value in leveraging their time so they use real estate agents, general contractors and management companies. Each of those adds a value that cannot be calculated in the price of a deal.

        In both cases, the intrinsic value is an intangible.

        As for turnkey, we don’t need to bridge the gap. I have a ton of respect for your opinion and wouldn’t think of trying to change your mind. I like the discourse and the differing opinion, which by listening is how we learn and grow as better business people and investors.

        In many cases I agree that purchasing far from home – turnkey or not – is more akin to gambling on the roulette table than real estate investing. Again, I enjoyed the article. Keep up the good work.

        • Ben Leybovich

          Chris – thanks for that!

          First – this is more of an intelligent conversation than any I’ve been able to have on the forums regarding TK. There appear to be a lot of TK guys in Memphis, but there only seems to be one real deal.

          Now – intrinsic value may or may not be subjective. In SFR, cost of new construction underscores a certain base-line. If I can build a nice house for $130 sq.ft, and that represents the intrinsic value baseline. And since market valuation of SFR is a function of CMA, using income to underscore value in SFR is just silly.

          Thus, I come back to the notion that value of TK SFR is that for which it can be sold, and re-defining it as anything more is incorrect in my opinion.

          If we were talking apartments, we’d have more to discuss in terms of perceived truths. But, CMA on SFR simply does not allow for any of that. Capitalizing value of SFR is simply wrong relative to the value-setting mechanics in an SFR marketplace.

          At the end of the day, what I like about Memphis Invest is that you seem to at least be dealing in $100,000 plus or minus property class, which in Memphis buys an asset that reasonably protects value, has some chance of appreciation, and attracts a tenant who is manageable, and therefore compresses your investor’s economic losses. That, and professional management infrastructure is why you are who you are, and I feel that this is the intellectually honest way of conducting TK model business. You client’s money should be reasonably well protected, and while they won’t strike it rich, the paper losses are likely what a lot of them need and accomplish with you.

          I tell anyone who asks that TK model is flawed. Yet, if they must have it, I refer them to you. I like you professionalism and knowledge very much, Chris! However, I don’t like that Josh Dorkin sent you more chocolates than he sent me – saw your post on FB, and…DMAN!

          Josh – what the hell?!?! 🙂

  6. Peter Crisp

    This strategy makes perfect sense, and it’s one I follow or try to. If someone is looking for an example, I have one. I look for properties with solid tenants (read – cashflow) in place, but the place is run-down, undermanaged or costs are too high. I like all three! I’m turning around a couple of buildings right now side-by-side in one deal. In a month after purchase, I’ve taken a long-vacant apartment used for storage (!) and it’s now rented it out, boosting revenue by 25% by simple renovations. Next, I pay for utilities including heat (in the market the building is in, this is common). So, I’m getting commercial grant money from the government with the aim of cutting the heating bill by 50% and the overall energy bill by 35%. Grants are important to me because it takes a lot of rental income to earn the equivalent of a grant and the grants are not treated as earned income – a double saving. I look for energy grants, façade grants – anything I can get my hands on. I factored in these savings before I purchased (note – I didn’t trust the owner’s numbers and I did my own calculations) and my numbers were/are spot on.

    As part of the energy upgrades, I’m going to replace the façade. I’m using style and material cues from high-end properties and I’m applying it to a Class C property. The energy savings and grants will pay for all the work in under 3 years and I’m now moving the property up in value, and I’m keeping it competitive with comparable properties in the area. Funding is from tenant cashflow and the grant money. It’s BRRR applied to small multifamily. The previous owner wanted to retire so he didn’t want to re-invest. I use my knowledge of building construction, finding deals on building materials and finding free money as a strategic advantage and now I’m uncovering the hidden intrinsic value of the property. One thing – I do use property managers because these are out-of-town properties, and I want to scale so I can’t do it all myself.

  7. Joe Canfield

    You MAKE your profit on the buy, you RECOGNIZE your profit on the sell.

    If you buy an asset, any asset, at the right price, you can always sell and get your capital and return back.

    If you are wrong on where you set intrinsic value (a fancy way of saying if you are wrong on how much you think the asset is worth), you’re gonna have a bad time.

    When it’s time to sell, the market will tell you if you got it right or not. Before that point, it’s all a matter of opinion.

    The concepts in real estate are simple, but the executing them properly is complex.

  8. Seems daunting to find properties of intrinsic value. I’m looking for rentals in Burbank, CA. Property values are really high and rents aren’t comparably high. Is it even worth buying properties in southern California/Los Angeles area?

  9. Chris Clothier

    Ben –

    The system is acting quirky and for some reason I could not respond to your last comment.

    One day I am going to write an article about the evolution of TK in Memphis. I’m sure some won’t like it, but that is ok. It rally is fascinating how nearly every company evolved from two people teaching others – not to take any credit away from entrepreneurs – but really, two people literally evolved the whole community into half a dozen companies and a lot of little players.

    As for this discussion, your points are great and again spot on. I understand and agree with many of them and respect them as sound advice. They won’t fit every investors’ agenda, but that does not take away from their merit or make them any less valuable. Always buy with the exit in mind, go deeper than simply “cash flow” ,which is so often ill defined and just a fantasy number anyway, and calculate IRR.

    For me, after reaching that number, I calculate those other, as I call them, intrinsic values and see how they effect my IRR.

    If, after calculating what I gain (aways my time) and what I give up to get it (a percentage of IRR) I am still satisfied with the deal, then I move forward. To this point that has helped me make some pretty good decisions. Thanks again!

    • Ben Leybovich

      Agreed, and Chris – if you asked me, and you haven’t, but if you did, I’d encourage you to write that article soon. The market is not what it was even a year ago, and you could save a lot of money and heartache for a lot of investors with more money than education and/or common sense… Write it!

  10. Donald Capwell

    I’m not sure how we went from a pretty standard “buy-it-at-a-discount-or-don’t-buy-it-at-all” post (which was good, btw, Ben) to a discussion on TK property, but I suspect that’s where the confusion about intrinsically value comes in. It’s about perspective…

    Correct me if I’m wrong, but TK “deals” are those that are CF positive when done right, but are sold to the end-investor at or near market value. The cash flow, if positive, factors into intrinsic value when the market is good, of course, but isn’t a large part of TK’s intrinsic value an assumption of future market appreciation? Isn’t that why TK properties are attracted to them as a long term strategy? For the TK investor, I make money when I sell, but also CF every money!

    The problem with this, though, is that intrinsic value is not “perceived” value, or even added value in the case of being able to walk in and CF right away without having to roll up the sleeves to work on the property. Instead, it is the value that a property will have at some time in the future… The problem is in making an assumption that a property will appreciate organically, especially in the present environment. Some would call this speculation… Positive CF in the short term is good, but the scenario Ben gives about a C property downgrading to a D not only affects CF but also market value. That’s a double whammy that can be avoided. Instead, “build appreciation” into the deal by buying at a discount and improving the property – this gives you the option to sell a property for less than market value if the market turns, but still make money, and enjoy CF in between.

    In the interest of full disclosure, I’m basing my post about intrinsic value upon a couple of decades of business management experience, including business valuation, and not on a draw of RE rental experience. It seems to translate, though. I hope to keep this alive long enough to either confirm that I’m looking at this correctly, or have my post rebutted. I haven’t studied TK investing at all, so I don’t mean to offend if I’m way off the mark,, and I won’t be offended if you tell me so!

    Sorry, guys, I tried to tag you both (Ben and Chris), but wasn’t able to do it from my tablet tonight…

    • Ben Leybovich


      Intrinsic value is combination of all value centers, discounted at some rate. The value centers in income-producing RE are 2: CF + Equity, and there are a couple of points here…

      One – if there is no equity to be had, the the intrinsic value is strictly cash flow. However, this must be discounted for the fact the there is no equity growth, meaning that the exit is cloudy and take a long time. Considering we are usually not talking a lot of CF to start with, this renders TK financial obsolete in many cases.

      Now – the reason I mention I like Chris is because I assume they deal in higher priced SFR within their marketplace. What happens then is that there is a potential for equity growth, which helps the exit. This should lower the discount rate applied to the CF, and thus makes a bit more sense as a model.

      Vast majority of TK, whether in Memphis, Cleveland, Toledo, or Indianapolis sell PIGS – financially obsolescent property that will never appreciate in value die to what it is and where it is. Underwriting those to the IRR reveals that you’d be better off buying inflation protected paper 🙂

  11. Donald Capwell

    Not sure what happened to my lengthy response the other day, Ben, but thank you for the reply… I think we’re saying the same thing here, so I’ll bow out gracefully here. I made some pretty impressive comments, though, apparently wasted only on myself! 🙂

    (Tagging not working again tonight, I see)… Cheers

  12. Alex Hively

    The wealth of knowledge that I just read was off the charts.
    From my understanding of the cycle of intrinsic value is that:

    In any neighborhood there are a set of class.A, class B, class C and class D homes.

    In your neighborhood there is a new apartment being built which is considered class A si what you want to do is buy class C/D at a discount with knowledge that after you fix it up it will be the new class A or does it only move up one class.

    Thank you.


  13. I’m not sure that you understand intrinsic value. Exit Cap, IRR, Et cetera, you seem to be discussing potential value rather then intrinsic. Intrinsic value is indeed subjective but in my personal opinion your missing the concept. That’s ok, it can be difficult, but as a value investor I’m not concerned with the potential value of the property and would try to conduct the analysis independent of an exit scenario. Id simply ask, do the future cash flows on the existing asset (on a DCF basis) produce a return on capital that is disproportionate to what I believe the risk to be. In a sense I’m just asking, is the price such that I’m receiving a yield that overcompensates me for my risk when I conduct my fundemental analysis. I’m not saying your post is bad advice, just that you can pay above intrinsic value for a property and still turn a healthy IRR after value add because you analyzed the potential value quite well. As a value investor though, this would be overpaying for initial optionality which therefore increases your execution risk on value add or decreases your ability to capture reversion pricing therefore reducing profitable scenarios to the one in which you HAVE TO add value

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