Does Forced Appreciation Really Work? Sure, But Beware of THIS Caveat.


When people ask me why I prefer commercial property — specifically apartments — to residential SFR, my answer typically goes something like this:

The value-setting mechanism in the single family marketplace is a function of something called Comparative Market Analysis (CMA). The fundamental logic of CMA aims to estimate value of subject property by comparing and contrasting it to like-properties that have sold.

This is to say, if 10 3/2 houses in this neighborhood have sold in the past six months in the range of $225,000 and $245,000, then most likely the subject will fit somewhere within this range. And from here, by looking more specifically at age, condition, and amenity package, we are able to narrow the projected value even further.

CMA is not what this article is about, and the only reason I am telling you this is to emphasize the fact that the controlling ingredient of value-setting is the marketplace; it is what people are willing to pay and have paid for this type of house in this location, and there is nothing much that you as an individual investor can do to drive the value. Indeed, all you can do is buy below the intrinsic value and then drive toward that value.

By contrast, as it relates to income property, the value is a function of income, on some level at least. It is generally thought that the reason we buy income property is to benefit from the income. Therefore, it seems as though the more income the income property is capable of producing, the more the property should be worth.

Such is the common wisdom, and in a lot of ways this is not wrong. However, there is one large caveat — let’s examine.

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Value of Income

Understand, all investors do not value income in the same way. All of us have differing opportunity cost that revenue streams are discounted by.

If you are willing to deploy capital for a fourplex generating NOI of $10,000/annum, so long as you achieve at least a 10% return, then at least in principle,  you would be willing to pay $100,000. In your world, 10% return is acceptable means of compensation for the effort of underwriting, procuring financing, closing, and overall ownership of said fourplex.

Related: Forced Appreciation in Buy & Holds: How to Create Your Own Great Deals

However, if you asked my friend Brian Burke, he’d tell you that while 10% may be respectable, the fact that the end result is a mere $4,000 of cash flow (if you’re lucky) renders this deal worthless to him. You see, Brian has much more efficient ways of creating $10,000 of value in his life than messing around with a fourplex, and therefore he is not at all interested — at any price. In other words, he needs another fourplex about as much as a dog needs five legs, and therefore this opportunity capitalizes for Brian to exactly $0. Not worth anything.

Note: This doesn’t make it a worthless project intrinsically. But it is worthless to Burke. That 10% return you need more than anything, Burke discounts to less than zero. Must be nice (don’t hate him).

If you talk to Serge Shukhat, he’ll tell you that he’ll buy it for half price. (I think I know Serge pretty well, and I’m pretty sure that’s exactly what he’ll say.) He is not quite as diversified as Brian in terms of businesses and real estate across several states, but he has long reached the point of diminishing returns on average deals nonetheless.

As such, in order to get Serge out of bed in the morning — get him to go pee and wash his hands, get him to turn on his computer, and get him to use two of the many available curvatures of his brain to consider your proposal — you’ll have to do a whole lot better than 10%.

As for me, I am known for doing few deals because even when I was really, really hungry, I was still lazy (you believe that?). Seriously, I do few deals because I pick the absolute best deals since my expertise is in creative finance and 100% finance, and there are very few assets out there that can support what I do.

Besides, while I have much respect for real estate, I just don’t like it that much unless it makes money and saves me from paying taxes. So unless it’s pretty much a guarantee that it can do that, I don’t buy. Well, a fourplex with $10,000 of NOI and $4,000 of cash flow on a good day just don’t get me excited.

Though, having said this, I am closer to Serge than Brian — I’ll buy it for the right price.

Your best bet is my dear friend Brandon Turner, the guy you know as a real estate extraordinaire, author, and all around good guy. I simply know him as the dude that buys Waldos, so this fourples is right up his alley. :).

Besides, with his first-born on the way (congratulate him if you haven’t yet), he sure needs the money. He absolutely needs to trade in his Toyota Prius for a nice Tesla. He’ll buy the fourplex and use the cash flow to make a third of his payment!

On second thought, Brandon’s been hanging around me for too long, so forget it.

Do you see my point? All of us see the same income stream, but all of us discount it differently. So, exactly what is the cap rate good for? 🙂 (This last statement was profound indeed. Ponder it!)


I just said that we all see the same income. I lied. What I meant to say is that you see pie in the sky, while the four of us see something else.

I am intimately familiar with the underwriting models of everyone I listed above. Well, with Brain’s and Serge’s anyway, since Brandon’s underwriting model corresponds to my number in his speed dial. 🙂

Brian, from a vantage point of virtually unlimited perspective, which I have come to respect immensely, will more than likely consider your $10,000 of NOI and disagree with you to a tune of about 30%, and that’s if all of the OpEx numbers you’ve got are correct. The 40% margin are those numbers that exist in real world, but not yet in you intellectual worth.

I will likely come in 5% lower than Brian (at least that’s what happens most times we underwrite the same deal). What can I say? I keep telling you guys that underwriting is storytelling. Well, Brian has been around longer and seen more than I, so he is able to zero in on the story with a bit more precision. Food for thought. Of course, being 5% lower is being $1.2 million lower on some of these deals.

Serge will probably come in higher than both Brian and me, and he’ll probably be wrong, but it doesn’t matter — he’ll just charge tenants more and squeeze more out of the investment to compensate for certain lack of foresight. I literally have no idea how he gets away with it every time, but he sure as hell does. That guy generates an additional 15% on the top line Monday through Friday, and a 5% bonus on Sunday! (He takes Saturday off.)

So, if the forced appreciation is supposed to net you some money on the sale, then it’s all about who you are selling to, guys.

Are You Selling?

If you are, then look for a young, inexperienced buyer who is willing to pay lots for income and who is inexperienced at underwriting realistic numbers. In this case, forced appreciation really does work. In other words, in this case you’ve found a buyer willing to pay you for your forced value. Fortunately, the marketplace is full of idiots and 1031 buyers.

Related: What Every Investor Should Know About Forcing Appreciation in Commercial Properties

Are You Buying?

Underwrite like Brian Burke. Or at least like Ben Leybovich. Or become the most efficient operator the world has ever seen, like Serge Shukhat.

If not, you might need to write a book or two. 😉

I killed it on this one, don’t you agree?

Investors: What’s your view on forced appreciation? Do you agree with my assessment?

Let me know with a comment!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. serge s.

    Haha Leybovich nice article. Sounds like your trying out a humorous slant on a serious topic. Yes my underwriting does come in higher than yours and Burke but it’s not so much because I charge more than the market. It’s because I have less mouths to feed than Burke and I’m not looking for “infinite” returns like you. And yes I’m glad to take a measly 4plex or SFR. Sure I would rather take down a large Multifamily but when those deals are few as today then I’m fine slowly growing one deal at a time. RE is a game of get rich slow and I would rather do it that way than sitting on the sidelines and waiting indefinately for the perfect deal.

    • Ben Leybovich

      Was I funny…?

      Serge – the presumption here is that buying something is less bad than buying nothing. You would agree, I am sure, that 999 out of 1,000 this is just not so. I am at a point where a deal has to convince me to buy because it’s so good. Otherwise, I pass – risk to the downside is too high…

  2. Al Williamson

    Good insight Ben – even though you discussed a 4-plex that would be appraised as residential property not commercial. Your points on underwriting is still valid …. for a cash buyer.

    On the sale side, If your buyer needs a loan, then their lender will look to a professional appraiser’s opinion of value. Indeed, as you stated, your buyer’s underwriting is something owners should be mindful of if they begin with the end in mind.

    Anyway, thank you for helping me see a larger picture. Much appreciated.

  3. Brian Burke

    This was a highly educational article, Ben! I learned: 1. Serge is the guy outbidding me on all of my offers. 2. Brandon isn’t buying anything because he calls you for deal advice and, well, you know where that leads. 3. You are a talented comedic writer and could be writing for Saturday Night Live but yet you choose to share your talents with the BP audience instead (don’t quit your day job–smart).

    In the world of real estate the buyer always sets the price. Thus, forced appreciation is subjectively received. Some will give value for your efforts, others, less so. But you only need one buyer so you don’t care which one of your cast of characters steps up. One will, and the rest of us will shake our heads and wonder what that crazy buyer was thinking by going that high…

    • Ben Leybovich

      Brian Burke – if we weren’t friends, and if I didn’t really, really love and respect you, I would hate you with all of the passion and intent of a neurotic Jewish classical musician violinist…there.

      Listen – when you want to get paid for your efforts of forcing value, you ask the same particular brokerage company to sell the thing for you. Why – because you know that due to who they target as buyers, there is more of a chance for your desired outcome. We both know who they target. I know because I’ve experienced it, and you confirmed 🙂

      So, yes, you only need one buyer. But, if you look in the wrong bucket, you’ll never find that one buyer, which is my point here.

      And will you ever stop being difficult for the sake of being difficult…?!

  4. Daniel Whitehead


    Your ability to combine your knowledge and defamatory statements about your friends all while explaining an educational example and presenting differing perspectives within the confines of ONE article is second to none. I always get a good laugh from your articles while learning something new. Great job on this one. Your writing style is unique and I enjoy reading your stuff.

    • Ben Leybovich

      I am glad you liked it, Daniel!

      If I weren’t here to put forth defamatory statements on my friends, who would…? Life would be so boring…

      Besides, they know I love them 🙂
      (some more than others, and it does help when they call me…Brandon)

  5. Brendan Morin

    Ben, when I read your articles, I’m sure I learn something, but it’s not always immediately clear just *what* that is. I think you just get into my head and ever so slightly turn up the volume on my inner skeptic with every new article. Keep up the great writing.

  6. Mark Forest

    Ben, when you mention creating underwriting bids are you discounting the cash flows using net present value analysis, but differing with your peers on the expected rate of returns you use for interest rate? I am desperately trying to understand the mechanics of what you are doing. Thank you for expanding.

    • Ben Leybovich

      Mark – mathematically this is a difficult subject. Essentially, NPV discounts future cash flows to a certain discount rate. This discount rate is the opportunity cost. The IRR is that discount rate whereby NPV of future cash flows is zero.

      The problem with IRR, and why some would say it is not entirely accurate is the fact that IRR presumes re-investment of returns at the same rate, which is likely not practical. Therefore, MIRR (modified internal rate of return) accommodates by allowing us to chose any re-investment rate we’d like.

      If you are going to be very propper, you will take the IRR and discount it via MIRR. The rate of re-investment return is different for all of us. Not to mention that NPV is the same for all of us if we discount cash flows only to inflation, but what about discount of lazy 🙂

  7. Mark Forest

    Ben, thanks for answering. The process you use to get your numbers for underwriting sounds like a great topic for a book or at least an article. Is MIRR the method you actually use? By the way, this article has the best minds on BP all in one place. I would like to see all of you continue to discus this topic.

    • Ben Leybovich

      Mark – MIRR is rather high-flying, and presumes that you have many opportunities available. Discounting ROI is done for the reason of deciding – do I do this investment, or do I do that other one. Naturally, this assumes you have access to many opportunities, as well as capacity to take action. When just starting out, when every $100 of cash flow is of the essence, I don’t know that it makes too much difference to go this deep into the woods…

  8. Sam Watson

    Very good read. Forced appreciation is a great source of return on income properties both for cash flows and terminal value – although it will depend on actually finding the right buyer, as you’ve noted. I’m on boat with your Serge example – raising rents especially given the right timing and jumping into the path of growth of a stronger submarket is a great technique in these days of low yields. You can always throw a little cash in to make your prop a little nicer to if you need some justification. Forced appreciation seems to be one of the only ways to generate solid risk adjusted returns in today’s market if you’ve only recently entered the buyer’s market.

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