why is this a Good Deal?

Great deals are hard to come by. The investment market is flooded with opportunities. And let’s face it, many operators aren't even in the business of finding great deals. They only need average deals to get paid and keep the lights on. But great deals do exist. You just have to know what to look for. It’s your job to separate the good from the bad. But what’s a good deal?

A good deal has:

• A defined, supported plan

• Upside

• Protected Basis

• Margin of Error

• Appropriately Capitalized

[Investment management rule #1: never lose capital. Also known as risk mitigation. The number one responsibility of any investment manager is to avoid equity wipeouts. That means buying at a protected price, with an appropriately designed capital stack, and cash set aside for margin of error. This is the baseline framework for acquiring assets. Any good and great deal will have risk mitigants, probably through lower leverage. Any bad deal (as defined by losing all your money), will have little to no mitigants, likely through over-leverage or lack of capital.]

Let’s dive deeper into how these elements come together.

Execution isn’t instinct—it’s a clear, data-supported process, backed by a capable team. It involves defining the acquisition plan and the steps required to execute it. In essence, we pose a simple question for any acquisition: Can we buy Deal A, improve it as well or better than comparable properties, and collect a premium for renovations that investors will find attractive?

To answer this question, we analyze the market.

Rents are the pulse of any deal. We need to hone in on the income upside. When comparing rents, make sure you’re comparing apples to apples—base rent only. Consider whether things like washers/dryers, Wi-Fi, or parking are included, but strip those factors out to get a pure rent comparison. What are nearby comparable property’s leased rents (aka effective rents)? What’s the premium for renovated units? What are the improvements made to the interiors and amenity set? A quick interior checklist that is commonly executed:

• Flooring

• Backsplash

• Countertop Material

• Appliance Upgrades

• Cabinetry (Front replacements)

• Lighting and other fixture Upgrades

• Smart Tech (smart locks, thermostats, etc)

_{Keep in mind… renovations need to be justified. Just because you can spend $15,000/unit to improve does not mean you should if the increases do not justify.}

Understanding the rent landscape means knowing where you can push and where you need to pull back. Every market has nuances; if you don’t understand them, you’re just guessing. You need to know which areas are desirable and growing and which are heading toward a cliff. If the property next door is charging $200 more per unit after upgrades, that’s your benchmark—but don’t assume you can match that if you don’t have the same quality or location.

Pricing is just as crucial. A good deal always begins with a fair price. That might seem obvious, but in today’s market, it’s a lesson that bears repeating. Too many sponsors are justifying deals based on comps from 2022, a completely different market. The reality is many markets across the country are resetting to 2019 price levels. Furthermore, a “protected” basis also contemplates replacement costs. That means your total acquisition costs (purchase price + capital + closing) are less than the cost to build the same asset today. This ensures you will have limited competition built, and if it is to be built, the rents will be well in excess of your project. need to buy right, or you’ve lost the game before it even starts.

You also need to plan for the unexpected. Things break. Roofs need repairs. Renovations get delayed. A good deal accounts for these “what ifs” with realistic capital reserves. Over the last few years, undercapitalized deals have been a huge problem, leading to cash calls when things inevitably go wrong. Smart sponsors know better—they plan ahead and have processes that inform capital and operations.

That brings us to the operating team. The operating team is the backbone of success (execution). A good deal doesn’t survive without an experienced team that can execute within the constraints of budget and time. Real estate is an operating business. From property managers to leasing staff, construction workers to maintenance crews, every cog in the machine matters. Poor execution is why half the distressed assets on the market today are struggling. Too much debt, not enough operational prowess. On the flip side, groups that took on leverage but executed like pros are doing much better (which might look like struggling less). That’s why debt/equity contemplation is essential.

Financing is another make-or-break factor. If your plan makes sense and the projected yields are reasonable, the financing will fall into place. But you can’t just take whatever financing is available—you need the right terms that align with the deal’s long-term goals. This is especially true when money is flowing fast. Lending tends to become most competitive towards the top of the market (ironically). Just because a bank puts 80% loan-to-cost options in front of you does not mean you should take it. Consider debt like caffeine and exercising. A couple of coffees and you're fine. But 7 coffees and a sprint can kill you. If you are not taking long-term fixed-rate debt (which is almost always the safer and better option) then you need to have a strong rationale for how you will refinance. This means supporting a clear path to a strong debt yield (NOI / Loan Amount). Banks and other lenders will look HARD at debt yield tests. Broad strokes, a 9% debt yield upon stabilization is relatively strong in today’s environment. This is why picking a proven plan and a growing area matters tremendously when executing a good deal.

Location matters, of course, but not in the simplistic way most people think. For residential properties, it’s about safety, access to good schools, and proximity to amenities. For commercial properties, it’s foot traffic and accessibility. Great locations come with a premium price tag, but they also lower your risk. Lesser locations might offer better returns on paper, but the risks can be much higher. That’s not to say great deals aren’t in bad areas, but the likelihood of something going wrong is much higher. For multifamily, you need to think like the resident. Where does your target renter want to live and why?

Now, let’s talk about the condition of the property. Newer properties may have fewer maintenance headaches, but older properties in prime areas often offer more upside potential. Of course, older properties come with higher capital expenditure needs—things like plumbing, roofing, and HVAC that eat into your yield. That’s why it’s critical to budget realistically and not get fooled by a shiny cap rate. You need to focus on yield after all the major expenses, not just the sticker number. Again, this is where an experienced operating team comes heavily into play. They know what to budget for. A good deal is well-capitalized. Even over-capitalized. It is much better to have a $1M set aside and use $750k than to have $250k set aside and need $750k.

Boiling it down. A good deal presents a well-defined, actionable plan, mitigates downside risks effectively, and delivers returns that are both compelling and appropriately risk-adjusted.

• There is a clear supported plan

• The project is well-capitalized to execute and have errors

• The Total Costs of the projected are protected

• There is upside on incomes and operations

• Financing is thoughtful (either long-term or a way out)

• There is a strong team to execute the plan

We have gone from a deal baseline (no lost equity) to a good deal (upside and execution). Now lets define how we go from good to great.

99% of great deals are being in the right place at the right time or seeing what others do not.

What turns a good deal into a great one? Time in the game and taking advantage of the right opportunity. Great deals take advantage of tailwinds—capital flows, cap rate compression, population growth, and favorable policies. These aren’t always underwritten—but they’re recognized when they happen. Timing and being in the game is everything. But you have to execute on the opportunity. There are a whole lot of sponsors that wish they would’ve taken the sky-high sale that now can’t. A great deal is an outperforming good deal realized (either through cash yields or IRR print).

Go find good deals and hit the gas when they turn great.