Most rental deals are won or lost before the offer — in the analysis. A disciplined screening takes ten minutes, follows the same order every time, and ends in a verdict you can defend: buy, negotiate, or walk away. This is that workflow, end to end, with one real example carried through every step.
Our running example: a single-family rental listed at $250,000, renting for $1,800/month, bought with 20% down and a 7% / 30-year mortgage. Spoiler, because honesty matters more than suspense: this deal fails the screening. Watching exactly where it fails is the point of the exercise.
On this page
- Step 1 — Start with income, and haircut it
- Step 2 — Subtract every operating expense, including CapEx
- Step 3 — NOI: what the property itself earns
- Step 4 — Cap rate: the unleveraged verdict
- Step 5 — Add financing: cash flow, cash-on-cash, DSCR
- Step 6 — Stress it before you trust it
- Step 7 — The verdict
- Common mistakes in rental analysis
Step 1 — Start with income, and haircut it
Gross scheduled rent is the seller's number. Your number is lower.
| Line | Per year |
|---|---|
| Gross potential rent — $1,800 × 12 | $21,600 |
| Vacancy allowance (5%) | −$1,080 |
| Effective gross income (EGI) | $20,520 |
Yellow = inputs · Green = calculated
Never run vacancy at 0%. Even a good tenant leaves someday, and one empty month a year is already 8.3%. We use 5% for a stable single-family rental and 7–8% for small multifamily. If a deal only works at 0% vacancy, it does not work.
Step 2 — Subtract every operating expense, including CapEx
Operating expenses are the costs of owning the property before the mortgage: property taxes, insurance, maintenance, management, and a CapEx reserve for the big items that wear out — roof, HVAC, appliances, water heater. For the sample deal:
| Expense | Per year |
|---|---|
| Property taxes | $3,000 |
| Insurance | $1,200 |
| Maintenance (5% of rent) | $1,080 |
| Management (8% of rent) | $1,728 |
| CapEx reserve (5% of rent) | $1,080 |
| Total operating expenses | $8,088 |
The CapEx reserve is the line most free calculators quietly leave out. It is real money on a schedule you do not control — the roof does not care that this year's spreadsheet looked better without it. How to size it is covered in our guide to the CapEx reserve — for screening, a separate line at 5% of rent is a defensible default.
Step 3 — NOI: what the property itself earns
Net operating income measures the property, not your financing. It deliberately excludes the mortgage payment, income tax, and depreciation. (The full inclusion/exclusion list is in our NOI guide.) Every later metric is built on this number, so if your NOI is flattering, everything downstream is fiction.
Step 4 — Cap rate: the unleveraged verdict
Cap rate tells you the return if you paid cash. At 5.0%, this property earns less from operations than a conservative investor usually wants for the risk — and, critically, less than the 7% the bank charges for the money. That gap is an early warning that leverage will hurt instead of help. Cap rate is a comparison tool, though, not a verdict by itself — see cap rate vs cash-on-cash for when each one should decide.
Step 5 — Add financing: cash flow, cash-on-cash, DSCR
The loan is $200,000 (80% of price) at 7% for 30 years:
Cash flow = NOI − Debt service = $12,432 − $15,967 = −$3,535 / yr = −$294.60 / mo
Cash-on-cash = −$3,535 ÷ $55,200 cash invested ≈ −6.4%
DSCR = NOI ÷ Debt service = $12,432 ÷ $15,967 ≈ 0.78
Total cash invested is about $55,200 (the $50,000 down payment plus closing costs). Read the three results together:
- Cash flow −$294.60/month — you pay for the privilege of owning this property, every month.
- Cash-on-cash −6.4% — the cash you put in is shrinking, not returning.
- DSCR 0.78 — the property's income covers only 78% of its debt payment. Many lenders want to see 1.20 or higher; at 0.78 the property cannot pay its own mortgage.
This is negative leverage in action: borrowing at 7% to buy a 5.0% cap-rate asset makes the return worse than paying cash, not better.
Step 6 — Stress it before you trust it
A single-point estimate is a hope, not an analysis. Before any verdict, flex the assumptions: rent −10%, a longer vacancy stretch, a rate one point higher. In the sample, the deal is already negative at the asking numbers, so stress-testing only answers one question — how much would have to change to save it. The cleanest expression of that is break-even rent: this property needs about $2,180/month just to cover its costs and debt, versus the $1,800 it actually gets. That $380 gap is your negotiation brief: the price, not the spreadsheet, has to move. (The derivation is in our break-even rent guide.)
Step 7 — The verdict
The property fails on cash flow, on cash-on-cash, and on DSCR, with realistic vacancy and a CapEx reserve included. It would need a materially lower price or a materially higher rent to screen differently — and "the market will fix it later" is speculation, not analysis.
This is what a screening is for. A tool that only ever says "great deal" is not a tool; it is a sales brochure.
Common mistakes in rental analysis
- Vacancy at 0% and expenses rounded down "to be fair to the deal." Be fair to your bank account instead.
- Skipping the CapEx reserve, which converts a marginal deal into a fake good one.
- Judging by cap rate alone — it ignores your financing entirely. A 5% cap rate with 7% debt is a losing combination.
- Using the seller's rent and expense figures without verifying taxes, insurance, and actual leases.
- Analyzing once, at one scenario. If small changes flip the verdict, the deal is fragile — price that fragility or walk.
- Counting appreciation as income. Appreciation is a possible bonus, never a line that rescues negative cash flow on paper.
Run your own numbers
The workflow above is exactly what our spreadsheet automates. Start with the free Lite version of the Real Estate Deal Analyzer — the main analyzer sheet with cap rate, NOI, cash flow, cash-on-cash, DSCR and the 1% rule check. If you screen deals regularly, the Full version adds a sensitivity grid, a 5-year projection with IRR, a BRRRR calculator, a 3-deal comparison sheet, and a 15-point due-diligence checklist. Both are on the Real Estate Deal Analyzer page.
Lite first, free — the seven steps above on one sheet.
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This guide is an educational calculation aid, not financial, tax, or legal advice. Verify all figures against local data and consult licensed professionals before purchasing any property.