Deal analysis
The numbers that decide a rental: cap rate, cash-on-cash, NOI, PITIA and the rules of thumb worth knowing.
Every rental decision comes down to a handful of numbers, and most bad deals come from getting one of them wrong, usually the expenses. This topic teaches each number on the same sample house so you can see how they connect.
Start with the full method for analyzing a rental, then go metric by metric: what each one measures, how to calculate it, what a reasonable value looks like, and where it misleads.
The method
- How to analyze a rental property
Screen it, price the income honestly, list every cost, add the loan, then judge the return against the risk. Here is the whole method on one $400,000 house, both ways.
- The 1% rule in real estate
A screen for rentals that takes seconds. Here is the math, what it leaves out, and how it scores one $400,000 house as a long-term and a short-term rental.
Return metrics
- What is a cap rate?
The return a property would earn bought with cash. How to calculate it, what moves it, and what it says, and does not say, about one $400,000 house.
- What is cash-on-cash return?
What your own dollars earn once the loan is paid. How to calculate it, what belongs on each side, and why one $400,000 house returns less than nothing as a long-term rental.
- What is net operating income (NOI)?
The number every rental return is built on. What goes in, what stays out, and how one $400,000 house comes to $20,664 as a long-term rental and $27,672 as a short-term one.
Loan math
- What is PITIA?
The payment a DSCR lender divides the rent by. What each letter covers, what else lenders fold in, and how one $400,000 rental's PITIA decides its coverage ratio.
- What is a loan-to-value ratio?
The number that sets your down payment, your rate and how much a cash-out refinance can return. Worked on one $400,000 rental, from the purchase to a refinance two years on.
Key terms
- Cap rate
- NOI divided by price: the return if the property were bought with all cash. A higher cap rate means more income per dollar, and usually more risk. Used to compare deals and to value income property.
- BRRRR
- Buy, rehab, rent, refinance, repeat: buy a property that needs work, fix it, rent it, then refinance at the new value to pull most of the cash back out for the next one. Usually a bridge loan followed by a DSCR loan.
- STR vs MTR vs LTR
- Short-term rental: stays under 30 days, furnished, run like a small hotel. Mid-term: furnished stays of one to twelve months, for travel nurses and relocations. Long-term: unfurnished, 12-month leases. Revenue, costs, rules and financing all differ.
- ADR
- Average daily rate. Revenue from booked nights divided by the number of nights booked. It says what guests pay per night, not how often they book.
- Occupancy rate
- Booked nights divided by available nights. Lenders that accept projections often want a minimum, around 60 to 65%.
- RevPAR
- Revenue per available rental night. Revenue divided by available nights, which is ADR times occupancy. The single number for comparing listings or markets, because it rewards both price and demand.
- NOI
- Net operating income. Rental income minus operating expenses (taxes, insurance, utilities, management, cleaning, repairs), before the mortgage. The basis of the cap rate.
- Cash-on-cash return
- A year's pre-tax cash flow divided by the cash put in (down payment, closing costs, renovation). It measures what the investor's own dollars earn, after the loan.
- Cash flow
- What is left each month after every expense and the full loan payment. A DSCR above 1.00 means the rent covers the debt, not that the property cash flows once cleaning, repairs and vacancies are paid.
- 1% rule
- A quick screen: monthly rent should be at least 1% of the price. Rarely met in expensive markets; good for filtering, never for deciding.