Every rental property looks good in the listing photos. The numbers are what tell you whether it is actually a good investment. The good news is that a solid first-pass analysis only needs five key metrics, and once you understand them you can screen deals in minutes.
Step 1: Estimate gross income
Start with the gross scheduled income: the rent the property would earn if every unit were occupied all year. Use market rent from comparable listings, not the seller's optimistic figure.
Then subtract a vacancy allowance for months when a unit sits empty between tenants. The result is your effective gross income (EGI).
Step 2: Add up operating expenses
Operating expenses are the costs of running the property, excluding the mortgage. Typical items include:
- Property taxes
- Insurance
- Property management fees
- Repairs and maintenance
- Capital expenditure reserves (roof, HVAC, appliances)
- Utilities paid by the owner, HOA fees, landscaping and other costs
Underestimating expenses is the most common reason deals disappoint.
Step 3: Calculate net operating income (NOI)
NOI = Effective gross income − Operating expenses
NOI is the property's income before financing. It lets you compare properties regardless of how they are funded.
Step 4: Calculate the cap rate
Cap rate = NOI ÷ Purchase price
The capitalisation rate shows the unlevered return on the property. It is useful for comparing similar properties in the same market, but it ignores financing entirely.
Step 5: Add financing, cash flow and cash-on-cash return
Now bring in the loan:
- Annual cash flow = NOI − Annual debt service (your total mortgage payments for the year)
- Cash-on-cash return = Annual cash flow ÷ Total cash invested (down payment, closing costs and upfront repairs)
- DSCR = NOI ÷ Annual debt service. Lenders often look for a debt service coverage ratio comfortably above 1.0, because it shows how much margin the property has to cover its loan.
A worked example
Here is a single-family rental analysed from start to finish.
Purchase and financing
- Purchase price: $250,000
- Down payment (25%): $62,500
- Closing costs: $7,500 and upfront repairs: $5,000
- Total cash invested: $75,000
- Loan: $187,500 at 7% over 30 years, a monthly payment of about $1,247, or roughly $14,969 a year
Income
- Rent: $2,300 a month, so gross scheduled income of $27,600
- Vacancy at 5%: −$1,380
- Effective gross income: $26,220
Operating expenses
- Property taxes: $3,000
- Insurance: $1,500
- Management at 8% of collected rent: $2,098
- Maintenance at 5% of rent: $1,380
- CapEx reserve at 5% of rent: $1,380
- Other: $600
- Total: $9,958
Results
- NOI: $26,220 − $9,958 = $16,262
- Cap rate: $16,262 ÷ $250,000 = 6.5%
- Annual cash flow: $16,262 − $14,969 = $1,293, about $108 a month
- Cash-on-cash return: $1,293 ÷ $75,000 = 1.7%
- DSCR: $16,262 ÷ $14,969 = 1.09
What the example teaches
A 6.5% cap rate might look reasonable, but at a 7% interest rate the property barely cash flows. A small repair or one extra month of vacancy could push it negative, and the DSCR of 1.09 leaves very little margin.
That does not automatically make it a bad deal. You might negotiate the price, increase rent after light improvements, choose different financing or accept low cash flow in exchange for expected appreciation. The point is to make that decision knowingly, with the numbers in front of you.
Common analysis mistakes
- Using the seller's rent roll instead of verified market rent
- Leaving out vacancy, maintenance or CapEx reserves
- Forgetting closing costs and upfront repairs in total cash invested
- Judging a leveraged deal by cap rate alone
- Analysing only today's numbers without looking at rent growth, expense growth and loan paydown over time
Faster, repeatable analysis
The Viqsa Deal Analyzer is a desktop app for Windows, macOS and Linux that calculates these metrics automatically for rentals, fix and flips, short-term rentals, BRRRR, commercial and multi-family deals. You can save your default assumptions, model different loan structures, run 30-year tax-aware projections and use the built-in AI Copilot to question your assumptions, all with your data stored locally on your machine.
Key takeaway: Always look at NOI, cap rate, cash flow, cash-on-cash return and DSCR together. A property can look strong on one metric and weak on another, and financing often makes the difference.
