Appreciation and rent growth compound, so a one-point error is not small. A full two-way IRR sensitivity grid, the break-even contour, and how to stress test.
Appreciation and rent growth are forecasts, and the moment a forecast is typed into a cell it stops looking like one. The discipline that matters is not picking the right number — it is knowing how wrong the number can be before the deal fails, and if you cannot state that boundary, you have not underwritten anything.
These two inputs do more work in a long-hold model than any other pair, and they get the least scrutiny. Purchase price is negotiated. Rate is quoted. Property tax is public record. Appreciation and rent growth are typed in from memory and then compounded ten times.
Take a $300,000 property on a ten-year hold.
At 3.0%/yr: $300,000 x 1.03^10 = $403,175 At 4.0%/yr: $300,000 x 1.04^10 = $444,073 Difference $40,898
One percentage point moved the terminal value by nearly half a 30% down payment. Now do the same to rent. Year 1 rent is $2,750/month, and growth starts in Year 2:
Year 10 rent at 2.5%: $2,750 x 1.025^9 = $3,434/mo Year 10 rent at 3.5%: $2,750 x 1.035^9 = $3,748/mo Cumulative gross rent, 10 years at 2.5%: $369,712 Cumulative gross rent, 10 years at 3.5%: $387,136 Difference $17,424
Neither number felt like an aggressive assumption when it was typed. Together they are worth more than $58,000 of gross outcome on a single property. Compounding does not care how confident you were.
There is a hierarchy here and most underwriting inverts it.
1. Published, checkable series. For rent, the Bureau of Labor Statistics tracks Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average, an index on a 1982–1984 = 100 base, seasonally adjusted, published monthly on FRED. It is auditable, published monthly on a fixed schedule, and free. It is also a national urban average, and your property is not the national average. It tells you the direction and rough magnitude of contract rent movement across all US cities combined. It tells you nothing about whether the three-bedroom in your submarket can carry another $75. Use it as a sanity ceiling on your local assumption, not as your local assumption.
2. Local comparable evidence. Actual signed leases in the same submarket, same unit type, same class, over the last twenty-four months. This is the only tier that describes your property. It is also the hardest to get and the noisiest, because a dozen leases is a small sample and half of them will have concessions you cannot see.
3. A broker's opinion. Useful as a check on tiers 1 and 2, worthless as a substitute. The person telling you the number is compensated when the transaction closes. That does not make them dishonest; it makes them an unsuitable primary source.
4. A number that makes the deal work. This is not a source. It is the deal telling you what it needs to hear.
Extrapolating a recent run. Three strong years is not a trend line, it is three data points. Markets that ran hard often ran hard because supply lagged demand, and supply responds. The years immediately after a run are the years most likely to disappoint the extrapolation.
Using a national number for a local decision. A national series is an average of markets that are diverging. Applying it to one property is like sizing a beam from the average span in the county.
Solving backwards. You need a 12% IRR. At 3% appreciation the model returns 9%. You try 5% and it returns 12%, so you write 5%. The assumption is now an output dressed as an input, and the model has stopped being a test — it is a mirror. This is the most common failure and the hardest to see in your own work, because every individual keystroke felt reasonable.
Treating the two as independent. In most markets, rent growth and price appreciation are driven by the same underlying demand — jobs, household formation, and supply that cannot respond quickly. Modeling 5% appreciation alongside 1% rent growth is possible but it is a specific claim about cap rate compression, and you should be willing to say it out loud. Modeling 5% and 5% is a bet that one force cooperates twice.
Constructed, not observed. A 30-year fixed at 6.67% (FRED, MORTGAGE30US, week of 13 Aug 2026), 8% vacancy — close to the national rental vacancy rate of 7.3% in Q2 2026 — and a ten-year hold.
| Input | Value |
|---|---|
| Purchase price | $300,000 |
| Down payment (30%) | $90,000 |
| Loan amount | $210,000 |
| Rate / term | 6.67% / 30-year fixed |
| Rehab | $10,000 |
| Closing costs | $8,000 |
| Total cash invested | $108,000 |
| Year 1 rent | $2,750/mo |
| Vacancy | 8% |
| Property tax | 1.1% of price, inflating 2%/yr |
| Insurance | 0.45% of price, inflating 3%/yr |
| Maintenance / management / CapEx reserve | 5% / 8% / 6% of gross rent |
| Selling cost at exit | 6% |
Year 1, fully built:
Gross scheduled rent $2,750 x 12 = $33,000
Effective gross rent $33,000 x (1 - 0.08) = $30,360
Property tax 1.10% x $300,000 = $3,300
Insurance 0.45% x $300,000 = $1,350
Maintenance 5% x $33,000 = $1,650
Management 8% x $33,000 = $2,640
CapEx reserve 6% x $33,000 = $1,980
-------
Operating expenses $10,920
NOI $30,360 - $10,920 = $19,440
Debt service $1,350.91 x 12 = $16,210.89
Annual cash flow = $3,229.11Cap rate 6.48%. DSCR 1.20 — right at the line lenders typically require. Cash-on-cash 2.99%. Rent ratio 0.92%. On the CasaWise Deal Score curve this comes out around 63, which is Fair (the anchors are published). This is a competent deal, not a marginal one. Watch what the two growth assumptions do to it anyway.
Method, so you can reproduce it: rent grows from Year 2 with Year 1 locked; property tax inflates 2%/yr and insurance 3%/yr; revenue-based costs stay proportional to gross rent; the Year 10 cash flow includes net sale proceeds of Property Value x (1 − 6%) − Remaining Loan Balance, with the balance after 120 payments at $178,782.47. IRR is the rate where the net present value of the whole series is zero, solved by Newton-Raphson (the same definition CasaWise uses).
Base case cash flow series, for reference:
Year 0 -$108,000 Year 1 $3,229 Year 6 $5,836 Year 2 $3,725 Year 7 $6,398 Year 3 $4,233 Year 8 $6,974 Year 4 $4,754 Year 9 $7,564 Year 5 $5,288 Year 10 $208,371 (incl. $200,202 net sale)
Ten-year IRR, appreciation down the side, rent growth across the top:
| Appreciation ↓ / Rent growth → | 0.5% | 1.5% | 2.5% | 3.5% | 4.5% |
|---|---|---|---|---|---|
| 1.0% | 4.86% | 5.73% | 6.62% | 7.53% | 8.45% |
| 2.0% | 6.86% | 7.64% | 8.43% | 9.24% | 10.07% |
| 3.0% | 8.72% | 9.41% | 10.13% | 10.86% | 11.61% |
| 4.0% | 10.45% | 11.08% | 11.73% | 12.40% | 13.09% |
| 5.0% | 12.09% | 12.66% | 13.26% | 13.87% | 14.51% |
Read the corners. The same property, same price, same loan, same rent on day one, returns 4.86% or 14.51% depending entirely on two numbers nobody negotiated.
Note also the asymmetry between the axes. Moving appreciation one point is worth roughly 1.5 to 1.8 points of IRR here; moving rent growth one point is worth roughly 0.7. That is leverage plus the terminal value doing the work — appreciation applies to the full $300,000 asset while rent growth applies to a cash flow stream that starts at $3,229. Anyone who tells you appreciation is the safe assumption has it exactly backwards. It is the assumption with the most torque and the least evidence.
Pick a hurdle. Say 10% — near the middle of the CasaWise IRR scoring curve, where 9% scores 50 and 18% scores 100. The combinations at which this deal returns exactly 10.00%:
| If appreciation is… | …rent growth must be at least |
|---|---|
| 5.0% | −3.43% |
| 4.0% | −0.23% |
| 3.5% | 1.11% |
| 3.0% | 2.32% |
| 2.0% | 4.41% |
| 1.0% | 6.16% |
And read the other direction: at 2.5% rent growth, appreciation must be at least 2.92%. At 0.5% rent growth, it must be at least 3.73%.
That is the underwriting. Not "I assumed 3% and 2.5%." It is: this deal clears 10% as long as appreciation holds above roughly 2.9% at consensus rent growth, and it survives a total rent-growth stall only if appreciation reaches 3.7%. At the base case it clears by thirteen basis points. Thirteen. A deal that clears its hurdle by thirteen basis points is not a deal that clears its hurdle.
If a property only works at above-consensus appreciation and above-consensus rent growth, you have not bought an asset. You have bought a directional position on a local economy, financed with a 30-year fixed and no exit before the market cooperates.
This is the Four Pillars point in its sharpest form. Cash flow is the only liquid pillar — it arrives monthly and pays for the roof. Appreciation is unrealized until you sell or refinance, principal reduction is locked in the walls, and tax savings depend on your bracket. A model whose return is carried by the terminal value is a model with no liquidity in the intervening decade. You cannot eat appreciation, and you cannot pay a $14,000 sewer line with it either. Our breakdown of what a good deal looks like starts from cash flow for exactly this reason.
Every analysis runs three times. The modifiers are published:
| Factor | Worst | Base | Best |
|---|---|---|---|
| Vacancy | x1.8 | x1.0 | x0.5 |
| Expenses | x1.2 | x1.0 | x0.85 |
| Appreciation | Market − 4% | Market rate | Market + 2.5% |
| Rent Growth | Market − 2% | Market rate | Market + 1.5% |
| CapEx | x1.4 | x1.0 | x0.7 |
With no market data available, the defaults are base appreciation 3.0%/yr and base rent growth 2.5%/yr, with a worst-case appreciation floor of −2.0% and a worst-case rent growth floor of 0.0%. When market data is available on a paid tier, the Base Estimate is not a default at all — it uses real local five-year appreciation and one-year rent growth for the address.
Look at the modifier column widths. Worst case takes four points off appreciation; best case adds only 2.5. Worst takes two points off rent growth; best adds only 1.5. That gap is deliberate. Downside in real estate is not the mirror image of upside — vacancy can go to 100%, rent growth cannot; a roof can cost $30,000 more than budgeted, it cannot cost $30,000 less than free. CapEx carries its own separate x1.4 modifier on top of the general expense multiplier for the same reason: big-ticket repairs overrun harder than operating costs do.
Run our $300,000 deal through it:
| Worst | Base | Best | |
|---|---|---|---|
| Appreciation | −1.0% | 3.0% | 5.5% |
| Rent growth | 0.5% | 2.5% | 4.0% |
| Vacancy | 14.4% | 8.0% | 4.0% |
| Year 1 NOI | $14,748 | $19,440 | $22,695 |
| Year 1 cash flow | −$1,463 | $3,229 | $6,484 |
| DSCR | 0.91 | 1.20 | 1.40 |
| Year 10 value | $271,315 | $403,175 | $512,443 |
| Net sale proceeds | $76,253 | $200,202 | $302,914 |
| 10-year IRR | −5.20% | 10.13% | 17.20% |
Base to worst is a 15.3-point fall. Base to best is a 7.1-point rise. The engine is built to punish you harder than it rewards you, because reality does.
One more piece of the mechanics: Year 1 rent is locked at the input value and growth begins in Year 2. That is not a rounding convenience. You signed a lease. Year 1 rent is a contract, not a forecast, and treating it as a forecast would inflate every downstream year by a full period of compounding.
Underwrite to the worst case. Be pleased by the base case. Never buy on the best case.
If the worst-case column is survivable — you can carry a −$1,463 year without selling — the deal is a risk you have priced. If it is not survivable, no amount of base-case IRR fixes that, because the base case is the one number in the whole model you are least entitled to. Set the assumption, then immediately ask what it would take to break it. If you cannot answer in a sentence with two numbers in it, go back to the grid. The same discipline applies to which return metric you lead with and to the offer itself.
Use 3.0% and treat it as a placeholder, not a finding. That is the CasaWise default in the absence of market data, and it is deliberately unremarkable. The more important step is running the grid: if the deal only clears your hurdle above 4%, the assumption is doing work the asset should be doing, and you should say so on the analysis rather than in your head.
Start with signed leases on comparable units in the same submarket over the last twenty-four months, adjusted for concessions. Use the CPI Rent of Primary Residence series as a national sanity check on the magnitude, not as the estimate itself. If local evidence and the national series disagree sharply, you need a reason for the gap you can state before you rely on it.
Usually not. Both are driven by the same demand: jobs, household formation, and supply that cannot respond quickly. Assuming high appreciation with flat rent growth is a specific claim about cap rate compression, and assuming both run high is a bet that one force cooperates twice. Move them together in your sensitivity grid, then check the off-diagonal corners separately.
Because downside is not the mirror image of upside. Vacancy can reach 100% and rent growth cannot; a major repair can overrun by $30,000 and cannot underrun by more than its budget. The asymmetry is built into the modifiers on purpose so that the stress case is genuinely stressful rather than a polite haircut.
It converts an assumption into a boundary. Instead of "I assumed 3% appreciation," you get "this deal clears 10% as long as appreciation stays above 2.92% at 2.5% rent growth." That is a statement you can monitor, defend to a partner, and check against the market a year later. An assumption you cannot falsify is not an assumption, it is a preference.
In a leveraged long hold, usually yes, and by a wide margin. In the worked deal above, one point of appreciation is worth roughly 1.5 to 1.8 points of IRR while one point of rent growth is worth about 0.7, because appreciation applies to the full asset value at exit and rent growth applies to a much smaller cash flow stream. That is precisely why appreciation deserves the most scrutiny, not the least.
Knowledge is power, and here it is the power to state the boundary before you sign. To run a property through worst, base and best in one pass — with live FRED mortgage rates, a full IRR series and the sale priced in — start with the free tier. No credit card.