The bigger the spread, the better the deal
How to Evaluate a Real Estate Deal in Under 60 Seconds
Before IRR. Before waterfalls. Before fancy models.
Real estate is a cash flow business, and the only thing that matters at the start is whether the deal creates value.
The mistake most people make is underwriting off in-place income. Instead, you should underwrite the future cash flow at today’s market rents, assuming zero rent growth.
That brings us to stabilized yield.
Stabilized yield is simply the post–value-add NOI divided by your total cost basis (purchase price + renovation costs). Conceptually, it’s EBITDA over invested capital.
Once you have that number, compare it to the market cap rate.
• If stabilized yield is below the market cap rate → value is destroyed
• If stabilized yield is above the market cap rate → value is created
• The bigger the spread, the better the deal
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You generally need at least a 150 bp spread for a deal to be worth pursuing.
Simple Example (Back-of-Envelope Test)
Market cap rate: 5.0%
Stabilized yield: 8.0%
Result: 300 bps of positive spread
Translation: The deal creates value and is worth deeper underwriting
30-Second Stabilized Yield Formula
Market Rent × Unit Count × 12 × 95% occupancy = Revenue
Revenue × Market NOI Margin = NOI
NOI ÷ (Purchase Price + Renovation Costs) = Stabilized Yield
If stabilized yield is 150+ bps above the market cap rate, keep going.
If not, move on.
Everything else IRR, DSCR, exit assumptions, rent growth comes later. If the stabilized yield doesn’t work, none of those metrics matter.
Stabilized yield. Market cap rate. What’s the spread?
Tune out the noise until you answer that first.
Source: Multifamily Insiders
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