Updated about 1 month ago on . Most recent reply
Two numbers every investor should run before they commit to a deal
In 2009 I was buying homes at courthouse auctions across Northern California. One walkthrough, no second look, renovation budget estimated on the spot. We did that 400 times and deployed over $100 million for institutional investors.
The single biggest mistake I watched other buyers make during that run wasn't overpaying. It was trusting seller projections without stress testing them.
Every pro forma shows you the ceiling. Full occupancy, optimistic rents, minimal expenses. Nobody hands you a document that shows what happens when things go slightly sideways.
Before committing to any deal I run three scenarios. Base case with current market rents and realistic vacancy. Conservative with rents 8% below market and vacancy pushing 12%. Downside with rents 15% off and vacancy at 20%.
If the deal survives scenario two it's worth pursuing. If it only works in scenario one you're not investing, you're just betting everything goes right.
The other number nobody talks about is break-even occupancy. Take your total annual costs, divide by gross potential rent, and you know exactly how much vacancy the deal can absorb before it stops covering itself. Above 85% and you have almost no cushion. Below 75% and you have room to breathe.
Run both before you run anything else.