How to analyze a rental property before you buy
Most people decide on a rental the way they decide on a house to live in: they walk through it and it feels right. A rental is not a home, though. It is a machine for producing cash, and whether it is a good one is a question of arithmetic you can answer before you ever make an offer.
Here is the same $250,000 property run through the five numbers that actually decide it.
The example
A duplex listed at $250,000. It rents for $2,450 a month. You put 20% down ($50,000) and borrow the rest at 6.5% over 30 years. Property tax, insurance, repairs, management and the rest come to about $9,800 a year.
| Number | What it measures | This deal |
|---|---|---|
| NOI | Rent minus operating costs, before the loan | $18,700 / yr |
| Cap rate | NOI ÷ price — the return ignoring the mortgage | 7.5% |
| Cash-on-cash | Cash flow ÷ the cash you actually put in | 3.2% |
| DSCR | NOI ÷ the loan payment — what a lender checks | 1.23 |
| 1% rule | Monthly rent ÷ price | 0.98% |
What each one is telling you
NOI (net operating income) is the rent you actually collect after vacancy, minus every operating cost — taxes, insurance, repairs, management — but before the mortgage. It is the property's own profit, independent of how you financed it.
Cap rate is NOI divided by price. It deliberately ignores the loan, which is why two buyers comparing the same building get the same cap rate. It answers "what does this building earn?" — here, 7.5%. Whether that is good depends entirely on your area; in some markets 7.5% is excellent, in others it is thin.
The mortgage never goes in the cap rate. This is the single most common mistake. Financing is your choice, not the building's quality, so it belongs in the next number, not this one.
Cash-on-cash is the annual cash left after the mortgage, divided by the cash you put in ($50,000 down plus closing and any rehab). This one does include the loan, because it measures your return on your money. At 3.2% it is modest — the loan is eating most of the NOI at today's rates.
DSCR is NOI divided by the annual loan payment. Lenders want it above about 1.2 — it means the rent covers the debt with room to spare. At 1.23 this deal just clears the bar.
The 1% rule is a 10-second screen, not a verdict: monthly rent ÷ price. Above 1% is worth a closer look. At 0.98% this one is right on the line, which matches everything else — a fair deal, not a steal.
The number that isn't on the listing
Every figure above comes from the price, the rent and the costs. None of them tells you what happens over time — appreciation, rent growth, loan pay-down and the profit when you eventually sell. That is the IRR, and it is the number that turns a modest 3.2% cash-on-cash into a real long-term return, because you are not just collecting rent, you are buying the building down with someone else's money.
A rental that looks flat on year-one cash flow can be excellent over a ten-year hold, and a rental with great first-year numbers can be mediocre if the area never appreciates. You need both views.
Run your own numbers
Every number here is arithmetic — no market secrets, just the property's own figures. Our Real Estate Investment & Rental Analyzer does all of it in one file: buy-and-hold, BRRRR, fix-and-flip and Airbnb side by side, with the cap rate, cash-on-cash, DSCR, the amortization and a 30-year IRR projection. Type in a price, a rent and a loan, and it tells you whether the deal works before you offer — not after you own it.
