How We Underwrite: The Discipline Behind an 8.5% Target Return

We talk a lot about our 8.5 percent target return. Now, let's talk about the discipline behind it.

That return doesn't come from taking big risks. It comes from being careful about which loans we make and how we structure them.

There's one idea that governs everything we do: we underwrite every loan as if there's a significant chance we could end up owning the property ourselves. That may sound overly cautious. But once that becomes your starting point, every decision that follows gets sharper. You stop asking "will this loan probably be fine?" and start asking "if everything went wrong, would we still be protected?"

Here's how we evaluate a loan, layer by layer.

Layer One: Value

It all begins with value. Everything we decide afterward depends on getting this one calculation right, since the size of our loan is set as a percentage of the property's value. Get the value wrong, and every decision after it is built on a bad foundation.

A loan usually comes to us in one of two forms: an acquisition, where someone is buying a property as it stands, or an acquisition with construction, where they buy a property, add value, and plan to sell it. Either way, our job is the same - land on an accurate value.

We start with our own internal market research, using the MLS and a range of valuation tools. But we never stop at our own opinion. We require a third-party independent appraisal on every loan. We don't rely on the borrower's numbers, and we don't rely solely on our own.

In practice, we lean hardest on a sales-comparison approach, and the emphasis matters. We care most about comparable properties that have actually sold, not just what's currently listed. A listing is only an asking price. A sale is what a real buyer was actually willing to pay. We look for properties similar in size, type, finish, and specification, and we use those real sale prices to determine what our property is actually worth.

When the property already exists, that's the more straightforward case: we can inspect it, have it appraised, and bring in a property inspector if needed. When it's a construction loan, we have to value something that doesn't exist yet, so we look at the area, the building plans, the specifications, everything that goes into the finished product, and determine what that property should be worth once it's complete.

Either way, we end up with a valuation we trust. That value drives everything else.

Layer Two: Loan-to-Value

Once we have that value, the next decision is how much we're willing to lend against it. This is the loan-to-value ratio, and it's where a lot of our protection comes from.

Our maximum in the Investor First Fund is 70 percent. On a property worth one million dollars, we'd lend at most $700,000. The borrower has to bring the other $300,000 themselves.

Here's why that matters so much. That $300,000 of the borrower's equity sits underneath our loan, and it absorbs the first losses if the property declines in value. At a 70 percent loan, the property would have to fall 30 percent before our principal is at risk. When we underwrite lower, 65 or even 60 percent (62% is our target ratio) that cushion gets even larger.

The lower we keep that ratio, the more protected our investors are. That's why we're always trying to lend less, not more, against a given property.

Layer Three: Marketability

That equity cushion only helps us if we can actually turn the property back into cash. If a loan goes bad, the way we recover our money is by selling the property. So before we ever lend, we ask a simple question: is there a real market for this property?

This is where we look at marketability. Is there too much inventory in the area, or is the property scarce and in demand? Does it fit its neighborhood? Are they building too large a house for the area, or finishing it to a standard that doesn't match what buyers around it actually want? We want genuine product-market fit, because a property that doesn't fit its market is a property that's hard to sell.

We also look at the property itself. Is it on a busy street, at a bad intersection, or next to something that would push buyers away? Anything that would slow down a future sale goes straight into our underwriting, because a slow or difficult sale is exactly what we want to avoid if we ever have to step in.

This is also the clearest and most common reason we decline loans. When we have real doubt about marketability, we say no. A good loan ratio on an un-sellable property is still a bad loan.

Layer Four: The Borrower

Everything described so far assumes the worst case. But the best protection of all is making sure the worst case never happens. A loan that simply performs, where the borrower makes every payment and finishes the project on time and never touches the equity cushion and never needs to be sold. That's the goal on every loan we fund. And it's why the borrower matters as much as the property.

So we look closely at who we're lending to: their credit score, their borrowing history, their track record. How many projects has this borrower completed? Are they an experienced builder? Have they bought and sold properties like this before? We look at their current portfolio, how much they owe, what their monthly obligations are, and what their income looks like.

We need answers to three questions:

1. Do they have the financial capacity to carry this loan and make payments through the full term?
2. Do they have a real track record of buying, building value, and successfully selling, having paid off their previous lenders along the way?
3. If the property produces income, do they have the experience to manage it, maintain it, and collect rent?

We're not looking for a borrower trying something new on our money. We want to lend into a process this borrower has already proven they can execute.

There's one more layer of protection on every loan we make: the borrower personally guarantees it. Beyond our first-lien claim on the property, we also hold a personal guarantee from the borrower. That means even in a default, our recovery isn't limited to the property alone - we can pursue the borrower personally for what they owe. It's one more reason a borrower thinks twice before walking away, and one more layer of security for our investors.

Layer Five: The Project as a Whole

The last thing we do is step back and look at the whole project together. Does it make sense? Is the neighborhood ready for it? Does the borrower's exit strategy actually hold up? Can they realistically buy it, build it, and sell it within the loan term, which is typically twelve months?

Then we come back to the question we started with, the one that governs everything: if this loan defaulted and we ended up owning this property at our loan basis, would we be comfortable owning it at that price?

If the answer is yes, the value is solid, the cushion is there, the property is marketable, and the borrower is proven, the loan has cleared our underwriting. That's when we deploy capital, confident we'll have payments coming in, strong collateral beneath us, and a good outcome for the borrower and for our investors.

The Bottom Line

That's how we underwrite. We start with an honest value, we lend conservatively against it, we make sure the property can be sold, we lend to borrowers who have done this before, and we only move forward on projects we'd be comfortable owning if we had to.

Each step is a layer of protection, and a loan has to pass through all of them before we fund a dollar. That discipline is exactly what stands behind the steady returns our investors have received for over 19 years.

If you have questions about our underwriting standards, or the guidelines we use for a specific area or type of project, we welcome them. Reach us at stallioncap.com or 512-548-0900. We look forward to working with you.