❌ Why This “18-Unit $2MM Value-Add” Deal Fails — And How the 85/45/24 Model Fixes It

Written by Jai Thompson

Intro

I manage a private equity platform deploying $13–18 million per quarter across multiple real estate asset classes. Our model is asset-based, escrow-directed, and execution-driven, allowing us to close in 23 days or less with certainty and clean title flow.

We acquire and operate across:

• Luxury estates

• Single-family residential portfolios

• Multifamily communities

• Hospitality and hotels

• Mixed-use properties

• RV parks and mobile home communities

• Golf resorts and destination assets

• Specialized housing and income portfolios

Capital is structured, operators are paid, reserves are built in, and all disbursements are controlled through escrow. We deploy with discipline, transparency, and speed—while tithing back to the communities we serve.

Let’s break down a popular “value-add” multifamily deal and compare it to how we actually buy assets.

The Deal Presented (Traditional Model)

Property

• 18-Unit Apartment + Single-Family Cottage

Purchase Price

• $1,730,000

Loan

• $1,120,000

• Interest-only, 4.5%, 3 years

Down Payment

• $638,344 (personal equity recycled from selling rentals)

Seller Repairs

• $100,000 pre-closing

Pro Forma Claims

• Future Value: $4,000,000

• Cap Rate: 10%

• Cash Flow: $8,328 per month

• Cash-on-Cash: 17%

Step 1: Is This a Good Deal?

Answer: NO

Here’s why — clean and simple:

1. Massive personal cash exposure

   • Over $638K tied up

   • Liquidity gone

   • Risk transferred to buyer, not the asset

2. Speculative value

   • The $4M value does not exist today

   • It depends on:

     • Perfect rent increases

     • No tenant churn

     • No expense creep

     • Stable cap rates

3. Interest-only loan cliff

   • In 3 years:

     • Payment shock

     • Refinance risk

     • Market timing risk

4. Lender underwrites YOU

   • Your liquidity

   • Your tax strategy

   • Your execution

   • Not just the asset

This is operator-dependent investing, not asset-based investing.

The Math Problem (Why It Looks Good on Paper)

They claim:

$8,328 / month cash flow

That’s:

• $99,936 per year

But…

Cash invested

• $638,344

Yield (3rd-Grade Math)

$99,936 ÷ $638,344 = 15.6%

Looks cute — but only if nothing goes wrong.

DSCR Reality Check

Let’s estimate annual debt service:

• $1,120,000 × 4.5% = $50,400 per year

If NOI barely supports this now, the DSCR is thin, and when interest-only ends, DSCR collapses unless the refi hits perfectly.

Lenders know this. That’s why they cap leverage and shorten terms.

Now Let’s Run the SAME Asset Through the 85 / 45 / 24 Model

This is where the game changes.

Step 2: Asset-Based Pricing (Our Way)

We don’t buy hopes and projections.
We buy control, equity, and margin.

Assume Stabilized FMV (Conservative)

• $4,000,000 (their own pro-forma claim)

Step 3: Our Numbers

Offer (85% FMV)

• $4,000,000 × 85% = $3,400,000

Recorded Price (45% FMV)

• $4,000,000 × 45% = $1,800,000

Lender Position (24% FMV)

• $4,000,000 × 24% = $960,000

Step 4: Seller Legacy Payoff (MANDATORY)

Seller Legacy Payoff = Offer − Lender

$3,400,000 − $960,000 = $2,440,000

✔ Paid via title-directed disbursements
✔ No seller carry
✔ No personal cash
✔ Escrow controlled

Step 5: Why Lenders Love This Structure

Loan-to-Value (True Risk)

• $960,000 ÷ $4,000,000 = 24% LTV

That is elite collateral.

Step 6: DSCR (Why Banks Relax)

Let’s say stabilized NOI is $400,000/year (10% cap on $4M).

Debt service on $960,000 at 6%:

• ≈ $57,600 / year

DSCR

$400,000 ÷ $57,600 = 6.94 DSCR

That’s not finance — that’s safety.

Step 7: Yield (Day-1, Not Hopium)

There is no $638K trapped.

Yield is calculated on:

• Buyer salary

• Cash back

• Reserves

• Trust allocation

Not fake equity.

This is why our deals cash-flow Day 1 and refinance clean.

Final Verdict

Traditional Deal?

❌ NO

• Too much personal cash

• Thin margin

• Refi risk

• Operator-dependent

85 / 45 / 24 Model?

✅ YES

• Asset carries the risk

• Lender is over-secured

• Seller is paid clean

• Buyer stays liquid

• Escrow controls everything

This is why banks, private lenders, and family offices prefer our model. It’s not aggressive — it’s disciplined.

Contact

Structure over sacrifice.
Stewardship over struggle.
Every deal builds legacy.