Most rental property "analysis" consists of plugging rent and a mortgage payment into a notes app and hoping the first number is bigger. That works until it doesn't — and by then you've closed on a property that bleeds cash.
Here are the five metrics that separate profitable deals from money pits. I use all five on every deal I evaluate. Each one takes about two minutes if you have the numbers in front of you.
Everything starts here. NOI is your rental income minus all operating expenses — before debt service. It tells you what the property actually earns.
Operating expenses include: property taxes, insurance, maintenance, property management, utilities (if landlord-paid), and reserves for capital expenditures. Do NOT include mortgage payments here — that comes later.
Example: A duplex rents for $2,400/month ($28,800/year). You estimate 5% vacancy ($1,440) and $10,800 in annual operating expenses. NOI = $28,800 - $1,440 - $10,800 = $16,560.
The most common mistake is underestimating expenses. Budget at least 5% of gross rent for maintenance reserves and 8-10% for property management even if you self-manage — because someday you won't.
Tells you the property's yield independent of financing. Useful for comparing properties and markets. 5-8% is typical for residential. Below 4% in most markets means you're overpaying.
Example: That duplex is listed at $240,000. Cap rate = $16,560 / $240,000 = 6.9%. Reasonable for a Midwest duplex.
Cap rate does not account for financing, so it's not your return — it's the property's return. Two investors buying the same property with different loan terms will have different returns, but the cap rate stays the same.
Lenders want 1.20 or higher. Below 1.10 is a red flag. Below 1.0 means the property cannot cover its own mortgage — you are paying out of pocket every month.
Example: You're financing with a $192,000 loan (80% LTV) at 7.25%, 30-year fixed. Monthly P&I is $1,310, so annual debt service is $15,720. DSCR = $16,560 / $15,720 = 1.05.
That DSCR is below the 1.10 red-flag threshold. The deal is tight. A single month of unexpected vacancy or one major repair wipes out your cushion. Most DSCR lenders would decline this loan, and that should tell you something.
The return on the actual dollars you put in. 8%+ is strong. Below 5% and you might as well buy an index fund with zero landlord headaches.
Example: Annual cash flow after debt service = $16,560 - $15,720 = $840. Your total cash invested = $48,000 down payment + $6,000 closing costs = $54,000. Cash-on-cash = $840 / $54,000 = 1.6%.
1.6% is terrible. A high-yield savings account pays more with zero effort. This deal only works if you're betting on appreciation — and "betting on appreciation" is another way of saying "speculating, not investing."
Captures everything over your hold period: rental income, property appreciation, and the equity your tenants build by paying down the mortgage. 12-15% is a solid target.
IRR is harder to calculate by hand because it requires a multi-year cash flow projection. This is where a spreadsheet earns its keep. You input your assumptions about rent growth (2-3%/year is conservative), appreciation (match local historical), and your exit timeline, and the IRR formula does the rest.
For our example duplex, assuming 2% annual rent growth, 3% appreciation, and a 5-year hold, the IRR might land around 8-10%. Better than the cash-on-cash alone suggests, but still not compelling for the risk.
Walk away if: DSCR < 1.10, Cash-on-Cash < 4%, or Debt Yield < 7%. No amount of optimism changes the math. If you have to assume above-market rent growth to make the numbers work, the deal doesn't work.
The duplex example above fails on DSCR and Cash-on-Cash. It's a pass. The right response is not to "make it work" by assuming higher rents or lower vacancy — it's to move on to the next deal.
Running these five metrics by hand — pulling up amortization schedules, calculating NOI line by line, building an IRR model — takes most people 1-2 hours. With a purpose-built spreadsheet, it takes 10 minutes. Fill in the blue cells, read the verdict.
NOI, Cap Rate, DSCR, Cash-on-Cash, IRR, sensitivity tables, Lender Solver, and a GO/NO-GO verdict. $29, one-time purchase. Excel + Google Sheets.
See the Deal AnalyzerWhat is a good cash-on-cash return for a rental property?
Most experienced investors target 8–12% cash-on-cash return on a leveraged rental property purchase. Below 6% is generally considered thin given the illiquidity of real estate. Above 15% in a normal market often signals either an exceptional deal or an underestimated expense — vacancy, deferred maintenance, or capital expenditures. The right threshold depends on your opportunity cost: what else could you do with that down payment capital?
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing — it measures property-level yield as NOI divided by purchase price. Cash-on-cash return measures your personal equity yield — it divides annual pre-tax cash flow after debt service by the total cash you invested (down payment plus closing costs). The same property can show a 6% cap rate and a 10% cash-on-cash return if the debt is structured favorably, or a 6% cap rate and a 3% return if rates are high and the deal is thin.
What DSCR is required for most rental property loans?
Conventional lenders typically require 1.25x DSCR minimum. DSCR loan programs — which underwrite the property's rental income rather than the borrower's personal income — commonly set a 1.10–1.20x floor. A 1.0x DSCR means cash flow exactly covers debt service with no cushion. Most experienced investors decline deals below 1.20x, knowing that one month of vacancy or a major repair will create a shortfall.
What is IRR and do I really need it to analyze a rental property?
Internal Rate of Return (IRR) is the annualized return that accounts for the timing and magnitude of every cash flow — your down payment going in, annual distributions, and the eventual sale proceeds. You do not need it for a quick buy/pass decision on a single deal. You do need it when comparing two deals with different hold periods, appreciation assumptions, or exit prices. A five-year IRR of 14% is meaningfully different from a ten-year IRR of 14% — the same percentage, but one returned capital faster.
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