Does It Pencil? The Five Numbers We Run Before Anything Else

"Does it pencil" is the oldest question in this business, and most people overcomplicate the answer. A 40-tab model can make anything look good. Before we open one, we run five numbers on a napkin. If they don't clear, we don't build the model — we move on. Here's the napkin.

1. Going-in cap rate vs. cost of debt

Net operating income divided by price gets you the going-in cap. Compare it to what debt costs today. If you're buying at a 6 and borrowing at a 7, you have negative leverage — every dollar of debt drags your return down, and you're betting entirely on rent growth or rate cuts to bail you out. Sometimes that bet is worth it. Usually it's a tell that the price is wrong.

2. Price per unit of the thing

Per square foot for warehouse. Per acre for IOS. Per door for multifamily. One number, compared against the last three comparable trades you actually trust. If the deal is 30% above the comps, there had better be a specific, defensible reason — irreplaceable location, in-place rent miles below market, entitlement upside. "It's a great asset" is not a reason.

3. Rent vs. market

What are tenants paying now, and what would they pay if the lease rolled today? In-place rent well below market is the cleanest kind of upside — you're buying a discount that fixes itself on renewal. In-place rent above market is the opposite, and it's the trap that kills more deals than any other. You're paying today for income that's going to fall.

4. The capex you're pretending isn't there

Every seller's pro-forma is clean. Every real building has a roof with a date on it, parking lots, HVAC, deferred maintenance someone's been ignoring. Put a real number on it before you fall in love. The deal that pencils at the purchase price often doesn't pencil once you fund the capital plan — and that's exactly the number the offering memo leaves out.

5. The exit you can actually defend

What do you sell this for, and to whom? If your return depends on exiting at a cap rate tighter than you bought — selling at a 5 what you bought at a 6 — you're underwriting cap rate compression, which is another way of saying you're hoping the market is friendlier later. Underwrite the exit at the same cap you bought at, or wider. If it still works, you have a real deal. If it only works with compression, you have a hope.

The point of the napkin

None of these five numbers requires a model. They require honesty. The model exists to confirm what the napkin already told you, not to argue you out of it. When the napkin says no and the model says yes, the model is lying to you — usually in tab 23, on an assumption you'll forget you made.

Run the five. If they clear, build the model. If they don't, you just saved yourself a day.