Every model has a rent growth assumption in it. Three percent is the industry reflex. Sometimes four, if the submarket is hot and the sponsor is optimistic.
We use zero.
Not because we think rents won't grow. They probably will. We use zero because of what the assumption does to everything downstream of it.
What a 3% assumption is really doing
Compound 3% across a five-year hold and you've added roughly 16% to your exit-year net operating income before you've done anything at all. At a fixed cap rate that's 16% more value, and it lands entirely in the equity.
Which means a meaningful share of your projected return comes from a number you typed into a cell. Not from a turn, not from an expense you cut, not from a lease you signed. From an assumption.
If the deal only works with rent growth, it isn't a value-add deal. It's a market bet with renovation attached.
What 2022–23 actually taught
The sponsors who blew up in that stretch mostly didn't misjudge demand. Phoenix rents held up better than the headlines suggested. What killed deals was the capital stack: floating-rate bridge debt, rate caps that expired, and exit assumptions built on cap rates that had been compressing for a decade and then stopped.
Those are three different bets stacked on one deal — rents up, rates down, caps tight. Any one of them going the wrong way is survivable. All three at once is not.
What we assume instead
- 0% rent growth. Any rent increase in our model comes from a specific unit, renovated on a specific date, priced against a specific comp we can name.
- Fixed or rate-locked debt. We've used agency non-recourse, local bank paper and seller carrybacks. What we don't use is floating rate with a cap and a hope.
- Exit cap at or above entry. No credit for compression. If it compresses, that's a gift, not a plan.
- Conservative leverage. Blended 58% loan-to-value at acquisition across our history.
What it costs us
Deals. Regularly.
We lose buildings to people whose models say yes because their assumptions are looser than ours. That's a real cost and I won't pretend otherwise. Discipline that never costs you anything isn't discipline — it's just a slogan on a website.
The trade is that the deals we do win have their return sitting in operations, where we control it. NOI up 67% over prior ownership across our stabilized assets didn't come from the market. It came from turns, vendor accountability, and rent rolls that got worked every month.
The test
Take your model. Set rent growth to zero. Set the exit cap equal to your entry cap.
If the deal still works, buy it.
If it doesn't, you've learned something more useful than the answer you had a minute ago — you've learned which part of your return you were actually counting on.
Nothing here is investment advice. Past performance is not indicative of future results. · ← All field notes