The 40% Rule: How I Screen a Deal in Four Minutes

Most people spend three weeks on a deal that should have died in four minutes.

They tour it. They build the model. They talk to the lender. They start telling people about it, which is the dangerous part, because now walking away costs them something socially. By the time the real numbers surface they are already committed in every way except signature.

This is the screen I run before any of that happens. It takes about four minutes and it kills most things.

The rule

Take 40% off actual gross income. See if there is still a deal.

That is the whole thing. Two words carry the weight.

Actual. Not projected. Not stabilized. Not market. What the property is collecting right now, from real tenants who are really paying, verifiable against a rent roll and bank statements. If someone tells you what it could produce, that is a different sentence about a different property.

Forty. Not derived from a formula. It is roughly the observed gap between what a model says and what shows up, plus enough margin that I sleep. Your number might be different. What matters is having one and using it every time.

Why 40 and not 20

Because your model contains everything you thought of, and reality contains everything.

Here is what shows up after closing, none of it individually dramatic. Insurance renews higher than you modeled, sometimes far higher. Something structural fails that the inspection missed, or flagged in language vague enough that you discounted it. A unit sits longer than your vacancy assumption. Taxes reassess on the new basis. A law changes that nobody priced. Turnover costs more than the number you used, because it always does. Management is worse than promised, or good and more expensive.

Each one is a rounding error. Together they are the difference between the spreadsheet and the bank account. And the gap runs in one direction, every time, on every deal I have ever bought.

A 20% haircut assumes you thought of half of it. You did not.

The four minutes

Minute one. Get actual gross. Trailing twelve months of collected income. Not scheduled rent, not asking rent. Collected. If the seller will not produce it, that is your answer and you are done in sixty seconds.

Minute two. Cut it by 40%. One line of arithmetic. Everything below is what you are actually working with.

Minute three. Subtract real debt service. At today’s rate, not the seller’s rate, not a rate you hope to get. If there is a reset or a balloon inside your hold period, use the rate you would have to refinance at, not the one on the current note.

Minute four. Look at what is left. Is there anything? Would it still be there if one large thing went wrong? Could you carry the property for a year if income stopped entirely?

If yes, the deal earns real diligence. If no, you are finished, and you spent four minutes instead of four weeks.

What this screen is not

It is not underwriting. It is a filter that runs before underwriting so you never build a model for something that was never going to work. Deals that pass still get the full treatment.

It is not a valuation method. It says nothing about what the property is worth. It says whether it is worth your attention.

It will reject good deals. That is the cost, and it is much lower than the alternative. There is no shortage of deals. There is a shortage of capital that survived the last mistake.

Pro forma rent

I do not look at it.

Pro forma is what the seller believes the property could produce under conditions that have not occurred. It is not a lie, exactly. It is a sales document wearing the clothing of an analysis. Someone built it to make a property look like something, and every assumption inside it was chosen with that in mind.

Look at it the way you would look at a resume, a claim about capability, not a statement of fact. Then go find out what is true.

If a broker package leans heavily on pro forma numbers, that is information about the deal.

The buffer is the position

There is a way of buying where everything works if things go as planned. Financing stretched to make the numbers clear. Reserves thin because the money went into the purchase. The deal pencils, barely.

That is not a deal. That is a bet that the next three years will be uneventful.

They are never uneventful. Rates move. Laws change. The insurance market has a bad decade. A tenant stops paying and the process takes far longer than you assumed.

If you are tight, any one of those forces a decision at the worst possible moment. If you have room, the same event is an annoyance you handle in a Tuesday afternoon phone call.

The cushion is not conservatism. It is what lets you stay in the position long enough for the thing to work, and time in the position is where the return actually comes from.

If you are not buying buildings

The principle generalizes, and it is worth stating plainly.

Every projection you are handed was built by someone with a reason to build it. The startup growth curve. The fund target return. The renovation estimate. The salary progression in the offer letter. None are lies. All are best cases that survived a set of assumptions chosen by an interested party.

Take a haircut. Then decide.

You do not need my number. You need a number, applied consistently, that reflects the honest distance between what people project and what shows up. Once you have one and you use it every time, an entire category of expensive mistake stops being available to you.

The rule, one more time

Actual gross income, minus 40%, minus real debt service at today’s rate.

Anything left?

That is the screen. It costs four minutes and it has saved me more money than any deal I ever closed.

This is how I think about screening deals. It is not investment advice, and your situation has details I do not know. Do your own diligence.