Stop Guessing — Start Screening
Most rental property deals that fail do so because the investor skipped the math. They trusted the listing agent's pro forma or ran one metric and called it good enough.
After analyzing 200+ deals, here are the 5 metrics that actually predict whether a rental property will make or lose money.
1. Cap Rate — Is the Price Fair?
Formula: Cap Rate = (Net Operating Income ÷ Purchase Price) × 100
| Cap Rate | Verdict |
|---|---|
| 8%+ | Strong yield |
| 6-8% | Solid for stable markets |
| 4-6% | Coastal / Class A typical |
| Below 4% | Hard to cash flow |
Quick math: Monthly rent × 12, subtract 40% for expenses, divide by asking price. If it's below 5%, move on.
2. DSCR — Will the Bank Approve It?
Formula: DSCR = Gross Rent ÷ PITIA
DSCR lenders require 1.0-1.25 minimum. Below 1.0 means you subsidize the property every month. Target 1.25+ for best rates.
3. Cash-on-Cash Return — Is My Capital Working Hard Enough?
Formula: Cash-on-Cash = Annual Cash Flow ÷ Total Cash Invested × 100
Target 8%+ for buy-and-hold. Below 4% means your money works harder in an index fund.
4. NOI Margin — How Efficient Is the Property?
Formula: NOI Margin = NOI ÷ Gross Rent × 100
Above 55% is excellent. Below 40% means the property is expense-heavy and fragile.
5. Vacancy Rate — How Risky Is the Market?
National average: ~6.4%. Below 5% is a tight market. Above 10% is a red flag.
Worked Example: Indianapolis Duplex
- Price: $195,000
- Rent: $1,650/month
- NOI: $13,600/year
- Cap Rate: 6.97% ✅
- DSCR (at 20% down, 7%): 1.26 ✅
- Cash-on-Cash: 2.5% ❌ (marginal)
This deal passes cap rate and DSCR but has thin cash-on-cash. Needs a lower price or higher rent.
Free Calculators
I built a set of free calculators at ArvCalc that run all 5 metrics in seconds. No signup required.
Run all five metrics on every deal. Takes 10 minutes. Saves you from buying a property that looks good on one metric but fails on the others.
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