Pre-offer underwriting: cash flow, cap rate, then max offer
Member since 2026 · 4 posts · 0 votes
Before I make an offer I force three numbers so I don’t buy hope:
1. Cash flow — rent in, full expenses out (vacancy, repairs, insurance, management, debt service).
2. Cap rate — so I can compare deals across markets without financing noise.
3. Max offer — back into the price that still works if rent is soft.
If max offer is below asking on conservative assumptions, I pass early. No showing, no emotional attachment.
What do you refuse to skip before you write an offer?
Good discipline, Rick. Passing before the showing is where most of the money gets made.
Three things I refuse to skip, after building and developing since 1996:
1. Underwrite it the way the lender will, not the way I hope. Before I write, I run DSCR at the lender's numbers. That means their vacancy factor, their rate, and usually a 1.20 to 1.25 minimum. If the deal only works at my rent assumption and fails at theirs, it doesn't work. The lender decides how much leverage I get, so their math is the math.
2. Price the rehab from a walk, not a guess. A per-square-foot number is a starting point, never a budget. I want a contractor's eyes on the roof, the mechanicals, and the foundation before the offer, then a 10 to 15 percent contingency on top. Rehab variance kills more deals than soft rent does.
3. Reset the taxes and insurance to post-purchase reality. The seller's tax bill isn't your tax bill. Many counties reassess on sale, and insurance quotes have moved fast in the last two years. Get a real quote. Plug in the reassessed number. Then check your cash flow again.
One more that saves me money: run the refi or exit on the same page as the purchase. If the ARV doesn't support pulling your capital back out, you've bought a hold whether you meant to or not.
Your max offer step is the right finish line. I just make sure every number feeding it came from someone who has to stand behind it.
Appreciate this, Ricky — especially the lender-first DSCR point. I've been burned assuming my vacancy and rate, then watching the deal fall apart when the bank's 1.25 shows up.
Your rehab-from-a-walk rule is the one I underweight most. A PSF placeholder feels productive until roof/mechanicals rewrite the max offer. Same with tax reassessment and a real insurance quote — if those aren’t in the model, the cash-flow number is fiction.
I’ve started treating “lender numbers + walk-based rehab + post-purchase tax/insurance” as inputs to the same max-offer step, not afterthoughts. And the exit/refi check on the same page is a good catch — buying a hold by accident is expensive.
Curious how early you get that contractor look before writing — LOI / soft offer, or only after you're serious?
Before I make an offer I force three numbers so I don’t buy hope:
1. Cash flow — rent in, full expenses out (vacancy, repairs, insurance, management, debt service).
2. Cap rate — so I can compare deals across markets without financing noise.
3. Max offer — back into the price that still works if rent is soft.
If max offer is below asking on conservative assumptions, I pass early. No showing, no emotional attachment.
What do you refuse to skip before you write an offer?
Depends on how fast the deal is moving.
If I have time, the contractor walks it with me at the first showing, before any number goes on paper. Twenty minutes on the roof, the panel, the furnace, and the basement walls tells me whether my rehab line is a budget or a wish.
If it's competitive and I can't get a contractor there in time, I write the offer with an inspection contingency and use that window for the contractor walk. The offer is built on my own walk-through estimate plus the 10 to 15 percent contingency. If the contractor's number comes back higher, I renegotiate or walk inside the contingency period. That's what the contingency is for.
What I don't do is write a clean offer with no contingency on a per-square-foot guess. That's the one that gets you.