Real estate investing is a scoreboard. There’s nowhere to hide.
For the last decade, the scoreboard was generous. Cheap debt. Rising valuations. Appreciation bailing out bad decisions. You could over-leverage, overpay, skip the hard work, and still come out ahead. A lot of people confused a bull market with skill.
Then the Fed raised rates 11 times in 17 months. That scoreboard reset overnight.
High-leverage deals penciled at peak pricing are deep underwater. Operators who told themselves they’d survive till ’25 are staring down ’26 with the same problems and fewer options. Cap rates are staying elevated. Rates are not going back to zero. The market that rewarded speculation is gone.
Good.
This is the market J19 wants. The one where brains and guts matter more than timing and leverage. Where the fundamentals separate the people who build real wealth from the ones who got lucky for a while.
Here are three criteria we use to vet every deal that crosses our desk. They aren’t new. They aren’t exciting. They’re what’s working.
1. Is It Tax Efficient?
The number that matters is not the return on a spreadsheet. It’s what you keep.
A deal returning 8% after tax can outperform one returning 13% before tax in TX and 16% in CA and NY once you run the tax math. That makes tax structure our first filter, before we look at anything else.
This comes down to depreciation. Residential properties let you deduct over 27.5 years. Nonresidential over 39. Cost segregation accelerates that by pulling out shorter-lived components, appliances, carpeting, cabinetry, and depreciating them on a faster schedule.
We run the depreciation math on every deal. Not as a nice-to-have. As a requirement. When you know exactly how much you’re keeping on every dollar, you move faster. You reinvest sooner. You have liquidity when the market tightens and everyone else is frozen.
We are buying 8 cap deals in secondary markets, 8% unlevered yields. By conducting a cost seg study we are able to allocate depreciation to cover all of income for our hold period, and keep an 8% after tax yield. With leverage, we can generate a double digit after tax yield. Once we sell, we can exchange into a new property and not pay capital gains and not pay recapture tax. We usually exchange into oil and gas minerals so we never have to exchange again. Find another property, and rinse and repeat.
You would be better of to take a tax deferred 10% and keep a 10% over a 14% and keep a 7% if living on the coasts.
2. Is Cash Flow Secure?
Cash flow is the least exciting concept in real estate. It’s also the one that keeps you in the game.
When appreciation is doing the heavy lifting, nobody talks about cash flow. When conditions tighten, like they have now, it’s the difference between holding your position and losing the asset.
The last cycle was full of investors chasing the upside. Getting ahead of the curve. Riding the momentum. Some of them made money. Then the capital moved on, demand shifted, and the revenue dried up. No cash flow underneath meant no floor when the market dropped out.
Unless there is yield we won’t look at it. If all the gain is on the backend, forget about it. And you should too. Make money today, take monthly distributions, get rewarded now and reinvest.
3. Are There Multiple Exits?
Getting into a deal is the easy part. Getting out on your terms, that’s the underwriting that actually matters.
Most investors plan one exit. Buy, improve, sell at the right moment, take the return. That works until rates spike, the buyer pool evaporates, or the market moves sideways for three years. One exit means one chance. Miss it and you’re selling into weakness with no leverage.
We watched it happen to smart people. Years of steady returns reversed in a single quarter because the only option was to sell into a market that didn’t want to buy.
We look for optionality. Conservative leverage that lets you refi and hold without pressure. Fixed-rate debt that buys you time. Versatile assets that give you more than one buyer pool or demand source. In the distressed debt space, the optionality is even wider, you can hold the note for income, modify terms with the borrower, foreclose and take the asset at a discounted basis, or exit the position as recovery comes.
We are buying high cap rate deals in secondary markets where supply hasn’t flooded the market with low leveraged debt. Most of the properties have a plan to grow cap rates from 8 to 10 with some simple improvement include tech packages for bulk internet, washer/dryer connections and machines, things people want and pay for. Additionally half of the properties have a plan for a condo conversion to residential buyers. We are generally seeing a 40-50% mark up in price.
We don’t get into anything unless we can get out more than one way.
Bottom Line
Tax efficiency. Secure cash flow. Multiple exits.
For 10 years you could ignore all three and the scoreboard still looked good. Appreciation covered everything. That cover is gone.
This business rewards meritocracy. Brains and guts. The willingness to do the boring work when everyone else is chasing the next thing. Success and failure are right there in the numbers. Nowhere to hide.
That’s what we like about this market. And that’s why the fundamentals are back!