Does the Deal Actually Work, or Do You Just Want It To?

Question

Vent time - a lot of investors, especially newer ones, want a property badly enough that they start giving the numbers a little too much credit. Bump the rent up, trim the repair budget, and assume they’ll refinance when rates come down. Eventually, it looks pretty good. Until it doesn't.

But what about the expenses that don’t hit your bank account every month? We call them “phantom expenses”—vacancy, maintenance, and reserves for the roof or furnace you’ll eventually replace. It’s easy to call that money cash flow while it’s sitting in your account. Then something happens, and a couple years of “profit” disappear. Ive been burned by this a few times and hate to see it happen.

If a small change in the interest rate makes or breaks the deal, I’d argue the numbers were probably too close to begin with. A future refinance shouldn’t be what makes today’s purchase affordable.

That said, everyone needs something different from an investment. Some people need dependable cash flow to leave their W-2. Others love their jobs and can comfortably accept less cash flow while investing for long-term appreciation and debt paydown. For others, depreciation is a bigger part of the strategy they’ve worked out with their CPA.

As markets shift across the country, I expect more opportunities. But you need to understand your own limits and talk to people who know the local market—investors, property managers, contractors, and lenders who can help you check those assumptions.

Curious to what everyone seeing out there.... Are the deals getting better, or are buyers just getting more creative with their math?

Ashish Acharya · Answer

Matthew, I think the “phantom expenses” point is one of the biggest things newer investors miss. A property can look great when you only look at the money hitting the bank account, but reserves for vacancies, maintenance, and future CapEx are part of the real economics.

I'd add that the tax picture can be just as different from the cash-flow picture. Money you set aside for a future roof isn't automatically a deduction, while depreciation can reduce taxable income without a corresponding cash expense.

I also agree that depreciation shouldn't be the thing that makes a marginal deal look attractive. I'd rather have the property work on conservative operating assumptions and then use the tax strategy to improve the after-tax return.

That's an important distinction between “the deal works” and “the tax benefits make the spreadsheet work.”

James Jones · Answer

Buyers are getting more creative with the math. I see it in the deals sent to me every week.

I own 236 properties and I still use the same screen I started with. Under $100K purchase on single-family in Memphis. ARV $180K to $265K. Rent that clears the 1% rule — for a 3BR, Section 8 here pays $1,395 to $1,950. Refinance underwritten up front at DSCR, 70-80% LTV, roughly 30-year money.

When rates or prices move, I do not stretch the ARV or the rent to save a deal. I pass and wait for the next one. Deal flow is my bottleneck, not deals. The day your exit depends on appreciation is the day you stopped underwriting.

Matthew Morrow · Answer

Agreed, phantom expenses are the ones that sneak up on people. Capex, vacancy, turnover costs. They don't show up month to month, so new investors leave them out until the bill hits. Good to hear a CPA say it plainly.

Stacy Raskin · Answer

I'm seeing more investors get deals that are favorable to them by asking for seller credits that are in effect buying down the interest rate and helping with closing costs. The seller credits can be quite helpful- for example, if a $300K purchase price, a buyer could get up to 6% of the purchase price in seller credits for some DSCR loan programs. In this example, it would be $18,000 to help pay to get the rate reduced and reduce out of pocket expenses. Since in many places in the country it's a buyers market, buyers are facing less competition and more opportunities to negotiate with sellers to increase cash flow as well as the cost to get into the property. Happy to connect to discuss further.

Matthew Morrow · Answer

Boring underwriting is underrated. Real rents, a contractor's walkthrough number, and reserves for the roof. That last one is where most deals quietly fall apart. Setting the walk-away number before the showing is the discipline most buyers skip, and it's the one that saves them.

Ametria Chaney · Answer

Great vent, and it's one I have with my buyers regularly. The deals I'm seeing work are the ones underwritten boringly — real rents (not pro forma), real repair numbers from a contractor walk, and reserves budgeted like the roof will need replacing. The ones that fall apart almost always leaned on a future refi or best-case rent to pencil.

I'd add one more: buyers falling in love with the idea of the property before the numbers clear. I tell my buyers to decide the walk-away number before the showing, not after. When rates shift, the disciplined buyers are the ones still closing — everyone else is just getting creative with spreadsheets.

Does the Deal Actually Work, or Do You Just Want It To?

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