1. establish gross rental income
Start with actual market rents — not the listing's pro forma. Pull rent comps from similar properties within 0.5 miles. For Section 8, check HUD FMR. Apply 5–8% vacancy in stable markets, 10–12% in transitional ones.
EGI = gross rent × (1 − vacancy)
Example: $1,400/mo × (1 − 0.08) = $1,288 EGI
2. calculate net operating income (NOI)
NOI is income after operating expenses, before debt service. Common expenses: property tax, insurance, management (8–10%), maintenance (5–10% of rent), CapEx reserve (5–8%), vacancy. NOI is property-level — never include the mortgage.
NOI = EGI − operating expenses
Example: $1,288 − $588 = $700 NOI/mo
3. calculate cap rate
Cap rate is the unleveraged return on the asset — how brokers value property. A 7% cap in Cleveland is not the same as 7% in Miami. For cash flow investing, target 7%+.
cap rate = (NOI × 12) / purchase price
Example: ($700 × 12) / $120,000 = 7.0% cap
4. calculate DSCR
DSCR is used by lenders to qualify your loan and by investors to evaluate deal quality. Above 1.25 means the property generates 25% more income than its debt service. Below 1.0 means the rent doesn't cover the mortgage.
DSCR = monthly rent / (P&I + tax + insurance + HOA)
Example: $1,400 / ($760 + $200 + $100) = 1.31 DSCR
5. calculate cash-on-cash return
CoC measures annual cash flow relative to actual cash invested (down payment + closing + rehab). 10%+ is strong. BRRRR can produce infinite CoC when you recover 100% of capital.
CoC = annual cash flow / total cash invested
Example: ($2,400/yr) / $25,000 = 9.6% CoC
6. quick screen with the 50% rule
The 50% rule estimates expenses at 50% of gross rent — useful for rejecting losers in seconds, not pro forma analysis.
quick cash flow ≈ (gross rent × 0.50) − P&I
Example: ($1,400 × 0.50) − $650 = $50/mo (marginal)
red flags
- seller pro forma with 0% vacancy and no CapEx reserves.
- rents above neighborhood comps with no explanation.
- property taxes based on previous owner's assessment — reassessment risk.
- deferred maintenance not included in rehab estimate.
- cap rate calculated on asking price, not after-repair value.
- flood zone, foundation, or environmental flags not disclosed.
green flags
- DSCR 1.25+ at 75% LTV with current market rent.
- cap rate exceeds local market average by 1–2%.
- rent-to-price ratio above 1% ($1,200/mo on a $120k property).
- long-term tenant already paying market rent.
- Section 8 voucher accepted — guaranteed government payment.
- property in a landlord-friendly state with fast eviction.