Most "Deals" Aren't Deals
Seventy percent of rental properties listed online have negative cash flow when you account for ALL expenses — not just the mortgage. Most new investors only calculate mortgage + taxes + insurance and call it a day. They miss vacancy, maintenance, capital expenditures, property management, and the 50 hidden costs of ownership.
The 7 Numbers You Must Calculate
Before you make an offer on any property, run these seven calculations:
1. Cap Rate — Net Operating Income / Purchase Price. Your baseline return if you paid cash. Aim for 5%+ in most markets, 8%+ in emerging areas.
2. Cash-on-Cash Return — Annual Cash Flow / Total Cash Invested (down payment + closing costs + rehab). This is your actual leveraged return. Should be 8%+ to beat index funds.
3. The 1% Rule — Monthly rent should be at least 1% of purchase price. A $200K property should rent for $2,000/month. This is a quick filter, not a final answer.
4. DSCR (Debt Service Coverage Ratio) — NOI / Annual Debt Service. Lenders want 1.25+. Below 1.0 means you're feeding the property every month.
5. Total Cash Needed — Down payment + closing costs + immediate repairs + 6 months reserves. The real number you need in the bank.
6. Break-Even Occupancy — What occupancy rate covers all expenses including debt service? If it's above 90%, the deal is thin.
7. 5-Year IRR — Internal rate of return including cash flow, appreciation, loan paydown, and sale costs. The true total return picture.
The Quick Comparison Method
Don't analyze one property at a time. Line up 3-5 potential deals side by side and compare all seven metrics. The winner becomes obvious fast.
Our Real Estate Investment Analyzer does exactly this — input the property details once and all seven metrics auto-calculate. Compare up to 5 properties side by side in one workbook.
Don't Skip the Stress Test
Before buying, model what happens if:
- Rent drops 10%
- Interest rates rise 1%
- Vacancy hits 2 months
- Maintenance costs $15K unexpectedly
If any of these wipe out your cash flow, the deal is too thin. Walk away.