Hey there —

The 2026 consensus is still Texas and Florida. Ours isn't: Cape Coral is down 7% in this month's numbers while Cleveland and Buffalo climb on both price and rent — five metros I'd underwrite, five I'd approach cold. I framed it as a $300K decision.

But a split market is only dangerous if your bar is wrong. Plenty of them will still "pencil" against the wrong number.

Friday's deal-analysis piece was going to tell you to price your offer at a 1.2 DSCR — the ratio every lender asks for, and one I've quoted for years without asking what it does to my side. On Sunday I did the algebra. I've spent the week rewriting Friday.

Here's what falls out. Price a deal to a 1.2 DSCR with 25% down and your cap rate lands at exactly 90% of your loan constant — the all-in annual cost of the debt, principal included, over the loan. The rate cancels out of the algebra.

Ninety percent. Every rate. Every time.

A cap rate under your loan constant has a name: negative leverage. It does not mean the deal loses money — at a 1.2 DSCR it cash-flows fine, roughly 4.7% on your cash. It means you're carrying an all-in cost of money higher than the building yields, and that gap comes out of your return.

Here's the complication. There are two of those thresholds, not one, and they disagree.

Your payment isn't only interest — it's interest plus principal, and principal comes back to you. So your cap rate against the loan constant tells you what the debt does to your cash; against the interest rate, what it does to your net worth. Those sit a point apart on a 30-year note, and in that gap your income falls while your equity climbs — a real trade almost nobody makes on purpose.

So what's the right number? Ours is the +5 Rule: your cap rate beats the 10-year Treasury by five points — 4.54% today (FRED DGS10, July 9). Three to five points over is yellow; under three is red.

Run it on the Cleveland duplex that drew nine offers in three days. Rent is $27,600 a year; take out $13,100 of real expenses and you're left with $14,500 of NOI. The ladder:

• $207,000 — the 1.2-DSCR price. Eight thousand over asking, into a nine-offer auction.
• $199,000 — the ask. A 7.3% cap, and it pays you +$240 a month. Also red on the +5 Rule, and under the 7.8% loan constant, so your cash return lands below the cap. Above the 6.75% rate, though, so the equity builds — and that equity is no view on Cleveland. The balance falls on schedule either way.
• $192,300 — where it stops being red.
• $186,300 — where the cap catches the loan constant and borrowing stops costing you yield. Still yellow.
• $151,800 — green. Where I'd actually want it.

The rule I've quoted for years would have had me bid over asking on a house that isn't green until a quarter off.

Here's the useful part: this is a verdict on stabilized turnkey bought with agency money. There are two ways out from under a 7.78% constant. Force the income up — that number is yours to move. Or take over the paper already on the house: an assumed 3% loan drops the cost of that money to about 5.1%, and the same house at the same rent clears both clocks. It still won't clear the screen — the +5 Rule prices the building, and at $199,000 that building yields 7.3% whoever holds the note.

Run your own deal through the calculator — ninety seconds, start to finish. Then paste this into ChatGPT or Claude for the part it won't do: argue with you.

I'm using the +5 Rule to decide whether a rental is worth buying. Price $___, rent $___/mo, annual taxes $___, insurance $___, vacancy $___, repairs $___, management $___, capex $___. I'll put ___% down at a ___% 30-year rate. Give me NOI, cap rate, cash flow, cash-on-cash, DSCR. Then run both leverage clocks: cap rate against my loan constant (annual principal and interest ÷ loan) — what the debt does to my cash — and against my interest rate — what it does to my equity. Say plainly if they disagree. Then score the +5 Rule: the 10-year is 4.54% as of July 2026 (check FRED DGS10 for today's). GREEN if my cap beats it by 5 points, YELLOW 3 to 5, RED under 3. Last: the price where this flips to a buy.

One question, and I read every reply: the last deal you looked at — what was the asking price, and what was the rent?

Martin

Someone forward this to you? It goes out Wednesdays.