How are you underwriting rental deals right now?

Question

I've been spending more time looking at how rental deals pencil in the current market, especially with insurance, taxes, and financing costs moving around.

When I review a deal, I usually start with a few basic questions:

- Are the rent comps actually supported by recent listings, or are they optimistic?

- What happens if taxes or insurance come in higher than expected?

- Am I using realistic vacancy, repairs, CapEx, and management assumptions?

- Does the deal still work if I need to exit earlier than planned?

- Is the spread between the cap rate and financing cost wide enough to justify the risk?

For example, a property can look decent at first glance if the rent-to-price ratio is strong, but once vacancy, repairs, CapEx, management, and debt service are layered in, the margin can disappear pretty quickly.

Curious how others here are thinking about this. What assumptions are you using right now for vacancy, repairs, insurance, and management when you analyze buy-and-hold rentals?

Garth Huxtable · Answer

I've been thinking about something lately and would love to get your thoughts on it. What if we looked at our assumptions as ranges instead of just one fixed number? For example, if a deal appears promising at a 5% vacancy rate but starts to falter at 8% or 10%, that’s crucial information to know before we proceed, right? The same applies to expenses such as insurance, repairs, taxes, and even interest rates.I feel like there’s a big difference between a property looking good on paper and actually having enough wiggle room for unexpected issues.

Amir Twig · Answer

Chris - "current expenses as if they'll survive the sale" is the best one-line summary of this whole thread. That one habit, re-basing every seller number to what YOU will actually carry, is most of what people actually mean when they say conservative underwriting.

Garth - since your question is basically about what I described, here's what my workflow actually looks like. The order matters more than the software:

1. Rebuild the day-one baseline from source data, not the listing: reassessed taxes off my purchase price, a real insurance quote (or a recent same-zip quote as a placeholder), rent from closed leases and comps, not asking rents.

2. Enter every assumption as a base + pessimistic pair from the start, so the stress case exists the moment the deal is in, instead of being a rebuild later.

3. One pass where I flip everything to the pessimistic end at once. If the deal survives that, the base case is just upside.

4. A forced-exit check: sale in year 2-3 at a flat price minus selling costs. If the deal only works because appreciation bails it out, that's a different bet than the one I thought I was making.

Whether that lives in a spreadsheet or something else matters less than never entering a number you haven't re-based. For me the spreadsheet version just got tedious enough that I ended up building the re-basing into my own tooling so it happens by default.

Curious for both of you - on the last deal you passed on, what actually killed it: an expense line, or the exit?

Hasan Gabareen · Answer

Hey Chris,

Garth hit on a critical point regarding range-based underwriting, relying on static assumptions is where a lot of investors get caught off guard today. The best approach is starting with a realistic baseline, like underwriting rents off actual closed leases rather than optimistic asking prices, and scaling CapEx/maintenance based on asset age, and then immediately testing the cash flow floor. With rising insurance costs, post-sale tax reassessments, and higher debt, you need to see how the deal holds up when vacancy bumps to 8–10% or expenses jump. If a property can absorb those shifts from your baseline without going cash-flow negative, you’ve got a truly resilient asset.

Always happy to connect and swap notes with other investors analyzing buy-and-hold deals—feel free to shoot over a message or connect anytime!

Garth Huxtable · Answer

@Chris Manolios

That distinction between whether a deal works and how much room it has before it stops working is what I was trying to understand. When you run the base, conservative, and stress cases, are you changing those assumptions manually in a spreadsheet/model, or do you have another process you use? I'm curious what that workflow actually looks like.

Amir Twig · Answer

Chris, that's a sharp list, and Garth's ranges point is the right instinct. The thing I'd add is that half the "stress test" is really just fixing wrong day-one inputs before you even get to ranges.

The two that quietly sink deals right now: taxes and insurance. People stress-test vacancy but then use the SELLER'S current tax bill and a stale insurance number. On a sale, taxes usually reset toward your purchase price, and insurance (especially anything coastal or older) has moved a lot. So I underwrite the reassessed tax and a real bound insurance quote from the start, not as a downside case, as the base case. That one correction kills more deals than any vacancy assumption.

On the ranges: the practical version is don't model your best guess, model the number you'd be embarrassed to defend. Rent at the low end of the comp range, vacancy at market plus a cushion, maintenance and capex combined around 10-12% for older stock. If it still clears your hurdle at that pessimistic set, it's a deal. The pretty base case is a vanity number.

Your exit-early question is the underrated one, and it's the tell for this market: underwrite a forced sale in year 2-3 at a flat-to-slightly-down price minus selling costs. If the deal only survives because you assumed appreciation bailed you out, that's speculation, not underwriting. And I'd watch that spread you mentioned, negative leverage (cap rate under your financing cost) is only ok if you've got a concrete, time-boxed plan to close it with rent bumps or value-add.

Honestly this is why I stopped underwriting in static spreadsheets and keep it in a model where I can flip every input to its pessimistic end in one pass, exactly Garth's ranges idea but without rebuilding the sheet each time. What's the assumption that's burned you most, the one you've stopped taking from the seller at face value?

Chris Manolios · Answer

Amir, great points. I agree completely on taxes and insurance. Those are usually the first seller-provided numbers I stop trusting until I verify them myself.

The assumption that burns deals the fastest, in my opinion, is using current expenses as if they’ll survive the sale. A low tax bill, light insurance number, or below-market repair allowance can make a deal look fine on paper, but once you reset those to what the buyer will actually carry, the spread can disappear quickly.

I also like your point on negative leverage. If the cap rate is below the financing cost, there has to be a very specific plan to fix that gap. Rent bumps, expense cleanup, renovation, better debt, something measurable. Otherwise you’re just hoping the market bails you out

Chris Manolios · Answer

Garth, I think that’s exactly the right way to look at it. A single fixed assumption can make a deal feel cleaner than it really is, but ranges show you where the deal starts to break.

I like to look at a base case, a conservative case, and a stress case. Vacancy might be 5%, 8%, and 10%; repairs and CapEx might move up depending on age and condition; insurance and taxes need their own cushion because those can change quickly after acquisition.

To me, the question is not just “does this deal work?” It’s “how much room do I have before it stops working?” If a rental only pencils with perfect rent, low vacancy, and seller-provided expenses, that’s usually a warning sign. The better deals still make sense after you pressure-test the major assumptions

How are you underwriting rental deals right now?

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