Deal Principle
Risk Over Reward
Big returns mean nothing if the worst case wipes you out. Before talking about upside, I want to understand what happens when things go wrong.
The Framework
Every deal has a best case, a realistic case, and a worst case. Most deal pitches lead with the best case. That's backwards. The deals worth doing are the ones where the worst case is survivable — not just the ones where the best case is exciting.
I'm not a pessimist — I'm a realist. Deals fail all the time for reasons nobody anticipated. Markets soften. Contractors disappear. Tenants stop paying. Permits get denied. When I evaluate a deal, I want to know: if all of those things happen, can we still get out without catastrophic loss?
How to Stress-Test a Deal
What if ARV comes in 10% lower than expected?
If a 10% miss on ARV wipes your margin, the deal is too thin. You should be able to absorb that.
What if rehab costs 20% more than budgeted?
Cost overruns are the norm, not the exception. If a 20% overrun kills the deal, your contingency isn't big enough.
What if it takes 3 more months to sell or refinance?
Holding costs stack up fast. Extra time is extra cost. Build in a buffer.
What if you can't find a tenant for 4 months?
Vacancy is real. Can you carry the property for a quarter without income?
What's the floor value if you had to sell fast?
If you need to exit quickly, what do you get? That's your worst case. Know it before you start.
This Isn't About Being Cautious
Risk management isn't about avoiding deals — it's about taking the right ones with clear eyes. Investors who skip the downside analysis aren't bold; they're uninformed. The best deals I've been involved in were deals where everyone understood the risks and decided the reward justified them.
The goal is to build something durable. One bad deal that wipes out capital takes years to recover from. Protecting your downside keeps you in the game long enough to catch the good ones.
When I look at your deal, I'm going to tell you what I think can go wrong — not to talk you out of it, but to make sure you're going in with clear eyes. If the downside is survivable, I'll tell you that too.