Deal Analysis
Every deal must be analyzed through a disciplined framework. The numbers either work or they don't.
How to analyze a rental property
Start with gross income, subtract all operating expenses to get NOI, subtract debt service to get cash flow. Then calculate cap rate, cash-on-cash return, and DSCR.
Gross income
Total potential rental income if the property were 100% occupied. This is your starting point for any analysis.
Operating expenses
All costs to operate the property: taxes, insurance, maintenance, property management, utilities, vacancy reserves, and capital expenditure reserves.
NOI (Net Operating Income)
Gross income minus operating expenses. This is the property's income before debt service. NOI is the most important metric in commercial real estate.
Debt service
Your total annual mortgage payment (principal + interest). This is what you pay the bank every year.
Cash flow
NOI minus debt service. This is what you actually take home. Positive cash flow means the property pays you; negative means you're feeding it.
Cap rate
NOI divided by purchase price. A 7% cap rate means the property generates 7% return on its value before financing. Useful for comparing properties.
Cash-on-cash return
Annual cash flow divided by total cash invested. This measures the actual return on your money and accounts for leverage.
DSCR
NOI divided by annual debt service. A DSCR of 1.25 means the property generates 25% more income than needed to cover its debt payments.
Vacancy
The percentage of time a property is unoccupied. Typical vacancy reserves: 5-10% for long-term rentals, varies for STRs by market and season.
Maintenance & Reserves
Set aside 5-10% of gross income for ongoing maintenance and 5-10% for capital expenditure reserves (roof, HVAC, appliances).
Break-even point
The occupancy rate needed to cover all expenses and debt service. Lower break-even = safer investment. Calculate: (Expenses + Debt Service) / Gross Potential Income.