How to analyze a rental property deal
Analyze a rental in a short stack of numbers: start with realistic gross rent, subtract expenses to get NOI, then check the cap rate, cash flow, cash-on-cash return and DSCR. A deal should be at least reasonable on all of them, not just one.
A deal is not one number; it is a short stack of them, each answering a different question. Run them in order and you can evaluate almost any rental in about fifteen minutes. The goal is not precision to the dollar; it is to separate the deals worth pursuing from the ones that only look good on the listing.
Start with honest inputs
Every metric is only as good as three inputs: realistic market rent (not the optimistic one), full operating expenses, and your financing terms. Use rented comparables for rent and apply a vacancy allowance of 5% to 10%.
1. NOI: what the property earns
Net operating income is effective gross income minus operating expenses, before the mortgage. It is the foundation every other number is built on.
2. Cap rate: the property's yield
NOI divided by price. Cap rate lets you compare very different deals on equal footing. Think of it as a market-comparison tool, not an absolute grade.
3. Cash flow: what you actually pocket
Bring in the mortgage and subtract every real cost. A common target is at least $100 to $200 per unit per month. Thin or negative cash flow is a warning unless you are deliberately betting on appreciation.
4. Cash-on-cash: your money's return
Annual cash flow against the cash you actually put in. This is how you compare the deal to other uses of the same down payment. Many investors look for 8%+.
5. DSCR: is it financeable?
Income over the loan payment. If you are using a DSCR loan, lenders typically want 1.20+, so this number can gate the whole deal.
The benchmarks at a glance
| Number | Reasonable target |
|---|---|
| Cash flow | $100 to $200+ per unit / month |
| Cap rate | 5% to 8% (market-dependent) |
| Cash-on-cash | 8%+ |
| DSCR | 1.20+ |
Do it all at once
Rather than run five tools, enter the deal once in the Rental Property Analyzer and see every KPI plus a verdict together.
Red flags to watch
- Rent assumptions well above nearby rented comparables.
- Expenses that look suspiciously low, or missing CapEx and vacancy.
- A deal that only works at the lowest imaginable interest rate.
- Deferred maintenance the cap rate quietly ignores.
Frequently asked questions
What is a good cap rate when analyzing a rental?
For most single-family rentals, 5% to 8% is a reasonable range, but cap rate is a comparison tool, not an absolute grade. A 5% cap can be great in a growing market and a 9% cap can be a trap in a declining one.
Cap rate or cash-on-cash, which matters more?
Use both. Cap rate compares properties without financing; cash-on-cash tells you what your invested cash actually earns. Cap rate shortlists, cash-on-cash decides.
How much cash flow should a rental produce?
A common floor is $100 to $200 per unit per month after every expense, including a reserve for vacancy and CapEx. The thicker the buffer, the lower the stress.
What expenses do people forget when analyzing a deal?
Vacancy, CapEx reserves and property management are the three most commonly omitted, plus a realistic property-tax reassessment after purchase. Leaving them out is the most common way a deal looks better than it is.