🤔 Is a "discount" actually a discount?

Hey there,

We've been hearing the word "discount" thrown around a lot in multifamily lately. Comps traded 25%, 30%, even 35% below their 2021-2022 highs, and the pitch writes itself: buy the dip.

Here's the problem with that framing.

At RBC, the only thing we value a multifamily property on is intrinsic value — the present value of all current and realistic future free cash flows. Nothing else. Not what it traded for two years ago. Not what the seller paid. Not “replacement cost”. Not what a broker's OM says a "comparable" property closed at during the cheapest debt environment in a generation.

So when a property traded at X in 2022 and is offered today at X minus 30%, that is not automatically a discount. If X was already 30% above intrinsic value back then — inflated by rent growth assumptions that were never going to hold and cap rates that assumed money would stay free forever — then today's price might just be fair. Or it could still be too high.

A Hypothetical Example:

Take a 120-unit property that traded in 2022 for $9.6M ($80,000/unit), underwritten on 8% annual rent growth and an exit cap rate compressed to 4.25% — both defensible assumptions at the time, and both wrong in hindsight.

That same property is on the market today at $6.9M ($57,500/unit) — a "28% discount" on paper, headline-ready for any OM.

Now run the intrinsic value math instead. Say current in-place NOI is $410,000. Realistic, achievable rent growth in this kind of market is closer to 3% annually, not 8%. Apply a cap rate that reflects today's cost of debt and actual risk — ex. 6.25%, not a fantasy 4.25% — and intrinsic value comes out to roughly $6.56M.

The asking price isn't a 28% discount. It's about 4% above intrinsic value.

That doesn't make it a bad deal — 4% over on a well-located asset with a clean rent roll might still pencil depending on our basis and hold period. But it's not the screaming discount the headline number suggests. The only number that ever tells you the truth is the one you calculate yourself, from the cash flows not the one printed in the marketing package.

Questions always welcome!

Nate & Steven
Rust Belt Capital, LLC

www.rustbeltcapital.com

_Disclosure:
Rust Belt Capital, LLC is not a Registered Investment Advisor. Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Rust Belt Capital, LLC does not provide tax advice and does not represent in any manner that any outcomes described herein will result in any particular tax consequence. This is not an offer to buy or sell any security. Offers to sell, or solicitations of offers to buy, any security can only be made through official offering documents that contain important information about investment objectives, risks, fees, and expenses. Prospective investors should consult with a tax, investment, or legal adviser before making any investment decision. Distributions or profitable investments cannot and are not guaranteed. Not intended to be tax advice and should not be solely relied upon to make an investment decision.