Why Deal Analysis Matters
The difference between a good investment and a bad one usually comes down to the numbers — and the discipline to actually run them before making an offer.
Too many investors buy based on gut feel, projected appreciation, or overly optimistic rent assumptions. The best investors treat every purchase like a business decision, backed by data.
Step 1: Estimate Rental Income
Start with realistic rent expectations:
- Pull comparable rents from Zillow, Rentometer, or local MLS data
- Talk to local property managers
- Account for vacancy (5–10% is standard)
- Consider whether you can add value to increase rents
Step 2: Calculate Total Expenses
Include everything:
- Mortgage payment (principal + interest)
- Property taxes
- Insurance
- HOA (if applicable)
- Property management (8–10% of rent if outsourced)
- Maintenance reserves (5–10% of rent)
- Vacancy allowance
- Utilities (if owner-paid)
Step 3: Determine Cash Flow
Monthly Cash Flow = Effective Rent – Total Monthly Expenses
If cash flow is positive, the property pays for itself and generates income. If it's negative, you're subsidizing the property from your own pocket.
Step 4: Calculate DSCR
DSCR = Gross Rent ÷ PITIA
This is the ratio lenders use to determine if the property income covers the debt service. Most DSCR loan programs require a ratio of 1.0 or higher.
Step 5: Assess the Return
Key metrics to evaluate:
- Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested
- Cap Rate = NOI ÷ Purchase Price
- DSCR = Gross Rent ÷ PITIA
A strong rental deal typically shows:
- Cash-on-cash return of 8%+
- DSCR of 1.15+
- Positive monthly cash flow after all expenses
Step 6: Stress Test
Run the numbers under less favorable conditions:
- What happens if rents drop 10%?
- What if vacancy is higher than expected?
- Can you still cash flow at a higher interest rate?
If the deal breaks under mild stress, it's probably too tight.
Tools to Help
Use our Long Term Rental Calculator to model the debt service and cashflow for your rental property deal.
Ready to discuss a specific deal? schedule with a Prime Advisor with an advisor.