What makes a real estate deal good right now is different than what made one good three years ago. The interest rate environment changed everything.

Here is the anatomy of a real deal in the current market.

Positive Leverage at Acquisition

Cap rate above debt cost. If you can buy at a 6.75 cap with debt at 6.25, you have positive leverage. The deal works without aggressive rent growth.

Negative leverage was acceptable in 2020 because rates were so low. It is not acceptable now. If the cap rate is below the debt cost, the deal requires rent growth to overcome the carry. That is a bet, not an investment.

Stabilized or Near-Stabilized

Heavy turnaround deals are dangerous in this environment. They take 18 to 24 months to stabilize. During that time, you are exposed to capital cost increases and market shifts.

Better to buy properties at 85 percent plus occupancy with clear path to 95 plus. The lease up risk is contained.

Below Market Rents With Clear Comps

In place rents 10 to 20 percent below market with comparable properties supporting the higher rent. Not a sponsor opinion. Documented comps.

This is the operational upside. Capture the loss to lease through turnover and renewal. NOI growth without depending on market rent growth.

Fixed Rate Debt

Floating rate debt is for transitional assets only. Stabilized assets should be on fixed rate. Five to seven years minimum.

Lock in the cost of capital. Remove interest rate risk. Focus on operations.

Reasonable Capex Budget

Capex budget that the operator can actually execute. Not a hope budget. A real budget with vendor bids and construction sequencing.

Capex that pays back through rent or expense reduction. Not vanity improvements that look good in photographs but do not move NOI.

Demographic Tailwind

Submarket with population and employment growth. Not declining. Not stagnant. Growing.

This protects against market deterioration during the hold. Even if your underwriting is right, you need the market to support it.

Reserves That Reflect Reality

Reserves funded at levels appropriate to the property age and condition. 300 dollars per unit per year minimum. More for older or higher maintenance properties.

Underfunded reserves are how deals go sideways. The boiler dies and there is no money. Make sure the reserves are there.

Honest Sponsorship

Sponsor who can explain every assumption. Sponsor who shows you the downside scenarios. Sponsor who has been through a cycle.

The deal can be right and still fail if the sponsor is wrong. The deal can be marginal and succeed if the sponsor is excellent. Sponsorship is the most important variable.

The Composite Test

A good deal in the current market hits most of these criteria. Not all of them. There are tradeoffs in every deal.

If a deal is missing three or four of these, walk. If it hits eight or nine, lean in. Discipline on the criteria is what produces consistent returns.

The Anatomy of a Good Deal in the Current Market