Every bad rental purchase looks great in the listing photos. The deal falls apart in the numbers, and most of the time the investor never ran them, or ran the wrong ones. A real rental property analysis is not a gut feeling about a neighborhood. It is seven specific numbers that tell you whether a property pays you or quietly bleeds you for the next decade.
Below is each number, the exact formula, and a single worked example so you can see how they connect. Run all seven before you write an offer, and you will pass on the deals that look good and write hard on the ones that actually are. For the full framework, start with our complete 2026 guide to analyzing a rental property, then use this post as the calculation cheat sheet.
The example property we will use
To keep the math honest, every number below runs on the same property:
- Purchase price: $250,000
- Down payment: 25% ($62,500), with a $187,500 loan at 7.0% on a 30-year fixed
- Closing costs and light rehab: $8,000
- Total cash invested: $70,500
- Gross scheduled rent: $2,450 per month ($29,400 per year)
Hold those figures in mind. We will reuse them seven times.
1. Net Operating Income (NOI)
NOI is the income the property produces after operating expenses but before the mortgage. It is the foundation every other number is built on, which is why getting it wrong poisons the entire rental property analysis.
Formula: NOI = Effective Gross Income − Operating Expenses
Start with the $29,400 in scheduled rent, subtract a 5% vacancy and credit loss allowance ($1,470) to get $27,930 in effective gross income. Then subtract real operating expenses: property taxes, insurance, repairs, a capital expenditure reserve, and property management. For our property those run about $9,930 a year.
NOI = $27,930 − $9,930 = $18,000 per year
The mistake that wrecks most beginner analyses is leaving out reserves and management. Even if you self-manage today, the property has to carry those costs, because one day you will hire out or sell to someone who does. The IRS publishes a useful list of what counts as a deductible rental operating expense in Topic No. 414, which is a good gut check on what belongs in this line.
2. Capitalization Rate (Cap Rate)
Cap rate expresses NOI as a percentage of price, so you can compare a duplex in Denver to a single-family in Dallas on equal footing. It assumes an all-cash purchase, which strips out financing and shows the property’s raw earning power.
Formula: Cap Rate = NOI ÷ Purchase Price
Cap Rate = $18,000 ÷ $250,000 = 7.2%
There is no universal “good” cap rate; it is relative to your market and risk tolerance. BiggerPockets has a clear breakdown of where investors get cap rate wrong. For the deeper version, including how to back into a price from a target cap rate, see our cap rate explainer.
3. Monthly Cash Flow
Cash flow is what actually lands in your account after the mortgage is paid. Appreciation is a someday number; cash flow is a this-month number, and it is the one that keeps you solvent when the furnace dies.
Formula: Annual Cash Flow = NOI − Annual Debt Service
The $187,500 loan at 7.0% costs about $1,247 a month, or $14,969 a year, in principal and interest.
Cash Flow = $18,000 − $14,969 = $3,031 per year, or about $253 per month
Notice how thin that margin is on a property with a healthy 7.2% cap rate. That is the reality of 7% debt: financing eats most of the spread. Protecting that margin is a discipline of its own, and the same cash flow habits that sink small businesses sink landlords. Our breakdown of the cash flow mistakes that quietly kill businesses applies almost word for word to a rental portfolio.
4. Cash-on-Cash Return
Cap rate ignores your loan. Cash-on-cash return measures the actual return on the actual cash you put in, which is the number that matters once you use leverage.
Formula: Cash-on-Cash = Annual Cash Flow ÷ Total Cash Invested
Cash-on-Cash = $3,031 ÷ $70,500 = 4.3%
On its own, 4.3% is modest, roughly what a high-yield savings account pays with none of the work. That is exactly why you never judge a rental on cash-on-cash alone, and why the next three numbers exist. For a full walkthrough of the traps in this calculation, read cash-on-cash return explained.
5. Debt Service Coverage Ratio (DSCR)
DSCR is the number your lender cares about most, and it should matter to you too. It tells you how much cushion sits between your income and your mortgage payment.
Formula: DSCR = NOI ÷ Annual Debt Service
DSCR = $18,000 ÷ $14,969 = 1.20
A DSCR of 1.20 means the property earns $1.20 for every $1.00 of debt payment. Most lenders want to see at least 1.20 to 1.25 on an investment property, so this deal just clears the bar. Anything under 1.0 means the property cannot cover its own mortgage, and you are subsidizing it every month. When a deal sits this close to the minimum, a single extended vacancy can flip it negative.
6. Gross Rent Multiplier and the 1% Screen
The first five numbers take real work. These last two are fast filters that let you kill bad deals in seconds before you bother with a full analysis.
Gross Rent Multiplier (GRM): Purchase Price ÷ Gross Annual Rent
GRM = $250,000 ÷ $29,400 = 8.5
A lower GRM generally signals a better price relative to rent. In most markets a GRM in the 7 to 10 range is worth a closer look. The companion screen is the 1% rule: monthly rent should be roughly 1% of the purchase price. Here, $2,450 is 0.98% of $250,000, just shy of the threshold. Whether that rule still holds in today’s market is worth a full read; we tackle it in does the 1% rule still work in 2026. Treat both as triage, not as a verdict.
7. Total Return (5-Year ROI)
This is the number that rescues our modest 4.3% cash-on-cash deal, because cash flow is only one of four ways a rental pays you. Total return stacks all of them: cash flow, loan paydown, appreciation, and the tax benefits you keep along the way.
Over a five-year hold, ignoring tax benefits to stay conservative:
- Cash flow: about $3,031 per year, roughly $15,200 over five years
- Principal paydown: your tenants retire about $13,500 of the loan
- Appreciation at 3% per year: the property grows from $250,000 to about $289,800, a gain near $39,800
Total five-year profit is roughly $68,500 on $70,500 invested, close to a 97% total return, or about 19% a year on average. That is the same property that looked like a 4.3% yawner on cash-on-cash alone. The lesson: no single number tells the truth about a rental. The full picture only appears when you run all seven.
Your rental property analysis checklist
Before you make an offer, calculate every one of these in order:
- NOI with vacancy, reserves, and management included, not wishful expenses.
- Cap rate to compare the property against your market.
- Cash flow after the real mortgage payment.
- Cash-on-cash return on every dollar you actually invest.
- DSCR to confirm the property covers its own debt with cushion.
- GRM and the 1% screen as fast triage filters.
- Total return over your hold period to see the whole payoff.
If you want to see these in motion on a real deal, our guide to running the numbers on a rental property walks through the most common ways investors get them wrong.
Run every deal through the same seven numbers
The investors who build durable portfolios are not the ones with the best instincts. They are the ones who run every property through the same disciplined analysis, every time, before emotion takes over. A spreadsheet that calculates all seven of these numbers the moment you type in a price and a rent turns a two-hour analysis into a two-minute one.
Grab a done-for-you rental analysis spreadsheet from our ready-made spreadsheet templates, built to spit out NOI, cap rate, cash-on-cash, DSCR, and total return automatically. Or if you would rather have a second set of eyes on a specific deal, book a free 20-minute consult and we will run the numbers together.
About Simply Spreadsheets: Simply Spreadsheets helps real estate investors and small business owners make confident, numbers-driven decisions. Founded by Erin Onsager, a fractional CFO with deep real estate and small business finance experience, we build the spreadsheets, dashboards, and analysis tools that turn messy data into clear answers. Explore our ready-made templates or fractional CFO services to get started.
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