Do You Underwrite to Win the Deal - or to Survive It?

Question

I’ve been thinking about how easy it is to make numbers work on paper.

Slightly higher rent.

Slightly lower vacancy.

Slightly optimistic exit cap.

Suddenly the deal looks great.

But I’m starting to believe conservative underwriting isn’t about pessimism — it’s about durability.

If rents grow slower than expected, if rehab runs 10% over, if rates don’t drop… does the deal still make sense?

Curious how others stress-test their assumptions before committing capital.

Denise Supplee · Answer

Hi @Pavel Voroniuk nice to meet you here on BP! I underwrite to today’s numbers, assume expenses and rehab go over, flatten rent growth, and make sure the deal still cash flows. If it only works in a perfect scenario, it is speculation. If it works when things go sideways, that is durability.

Landon Mickelberry · Answer

I think durability beats optimism. I stress-test deals by running “what-if” scenarios...rents flat, rehab +10%, vacancy higher, rates +1–2%.

If it still works, it’s usually solid. I also dig into neighborhood trends and bedroom-level cash flow to catch hidden risks.

How do you usually stress-test your deals? Spreadsheets or tools?

Josh Mac · Answer

I tend to think about it a little differently from the note side.

For me it’s more about breakpoints, how long can it carry if payments stop, what do timelines look like if things drag out, and how much cushion is really there in the collateral.Durability isn’t growth assumptions as much as it is friction tolerance.Interesting how different strategies define margin of safety.

Dan H. · Answer

I consider my underwriting slightly conservative but others think it is very conservative.

For example for last 3 years I have under wrote no rent growth and no appreciation for first 5 years.   My maintenance/cap ex starts at $300/month for small attached 2/1 non condo.  It goes up if detached, more bathrooms, yard, larger, etc.

I do not need to make RE purchases.   I am not going to make RE purchases unless they are projected to return far greater than passive options like the sp500.   Residential RE is a lot of work and has a plethora of risks.   I need a return that provides me a high compensation for my efforts.  My time and skills are very valuable, why would I not expect to be extremely well compensated?   I want projections that have a very high likelihood of being met.

good luck

Bo Smith · Answer

Strong thread. Conservative underwriting is exactly right. Too many deals look amazing on the spreadsheet because the assumptions are optimistic -- if everything goes perfect. But real estate doesn't work that way. The deals that actually make money are the ones that work even when things go wrong.

Here's my stress test: I underwrite to current market rent (not projected), assume a 6-month vacancy year, build in 10-15% rehab contingency, and model a rate increase of 0.5% at refi. If the deal still hits my minimum cash-on-cash return under those assumptions, I'm comfortable. If it only works if rent climbs 5% a year and nothing breaks, it's not a deal -- it's speculation with borrowed money. As you said, durability beats perfection every time.

Most investors fail because they fall in love with the "best case" scenario and ignore the "bad luck" scenario. In your experience, what's the single assumption that trips up most deals you've seen -- is it the rent projection, the rehab costs, or something else?

Bo Smith · Answer

Strong thread. Conservative underwriting is exactly right. Too many deals look amazing on the spreadsheet because the assumptions are optimistic -- if everything goes perfect. But real estate doesn't work that way. The deals that actually make money are the ones that work even when things go wrong.

Here's my stress test: I underwrite to current market rent (not projected), assume a 6-month vacancy year, build in 10-15% rehab contingency, and model a rate increase of 0.5% at refi. If the deal still hits my minimum cash-on-cash return under those assumptions, I'm comfortable. If it only works if rent climbs 5% a year and nothing breaks, it's not a deal -- it's speculation with borrowed money. As you said, durability beats perfection every time.

Most investors fail because they fall in love with the "best case" scenario and ignore the "bad luck" scenario. In your experience, what's the single assumption that trips up most deals you've seen -- is it the rent projection, the rehab costs, or something else?

V.G Jason · Answer

The last 3 years people have paid to win it, and see how that's gone for them? Some can't survive it.

Always bid to survive it.

Pavel Voroniuk · Answer

Hey  @Denise Supplee! Thank you for sharing your perspective.

Pavel Voroniuk · Answer

@Landon Mickelberry that makes a lot of sense. I usually use excel sheets to stress test the deals.

Do You Underwrite to Win the Deal - or to Survive It?

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