How to analyze a rental property in four numbers
Before you make an offer on a rental, four numbers tell you most of what you need: net operating income (NOI), cap rate, cash-on-cash return and debt service coverage ratio (DSCR).
1. Net operating income (NOI)
Operating expenses include property taxes, insurance, repairs and maintenance, management and utilities you pay. They do not include the mortgage payment.
2. Cap rate
Cap rate measures the property's return as if you paid all cash. It lets you compare deals regardless of financing.
3. Cash-on-cash return
Total cash invested is your down payment plus closing costs and any upfront repairs.
4. Debt service coverage ratio (DSCR)
A DSCR of 1.00 means the property's income just covers the loan payments. Many lenders look for 1.20 or more, but requirements vary.
Worked example
| Input (illustrative) | Value |
|---|---|
| Purchase price | $250,000 |
| Rent | $2,200/month ($26,400/year) |
| Vacancy | 5% ($1,320) |
| Operating expenses | $8,400/year |
| Loan | $187,500 at 7.0%, 30 years ($1,247.44/month) |
| Cash invested | $62,500 down + $7,500 closing = $70,000 |
| Result | Math | Value |
|---|---|---|
| NOI | $26,400 − $1,320 − $8,400 | $16,680 |
| Cap rate | $16,680 ÷ $250,000 | 6.7% |
| Annual debt service | $1,247.44 × 12 | $14,969 |
| Cash flow | $16,680 − $14,969 | $1,711 |
| Cash-on-cash | $1,711 ÷ $70,000 | 2.4% |
| DSCR | $16,680 ÷ $14,969 | 1.11 |
A respectable cap rate can still produce thin cash flow once financing is added. Here the deal clears its loan payments, but only just.
The 1% rule
A quick screen: monthly rent should be at least 1% of the purchase price. In the example, $2,200 ÷ $250,000 = 0.88%, so it fails the screen. Treat the rule as a filter for which deals deserve a full analysis, not as a verdict.
Skip the build: Rental Property Quick Analyzer
Everything in this guide is already wired up in a tested Excel and Google Sheets template, with a filled-in example and a blank copy. Formulas are fully visible, with no passwords and no hidden sheets.
For planning and information only. Not financial, tax, legal or investment advice.