Analyse a rental for cash flow, cap rate, cash-on-cash return and total IRR.
Rental property analysis starts with Net Operating Income (NOI): gross rent minus vacancy losses and all operating expenses — but before mortgage payments, depreciation, or income taxes. NOI is a property-level metric; the same property has the same NOI regardless of how it's financed. Cap rate (NOI / purchase price) lets you compare properties without financing noise. Cash-on-cash return adds financing back: it measures the annual after-debt cash flow relative to your actual cash outlay. DSCR (NOI / debt service) is the lender's metric — most banks require ≥ 1.25. Total IRR models your full equity return including eventual sale proceeds, giving a single annualized number that captures both income and appreciation.
NOI
NOI = Effective Gross Income − Operating Expenses (no debt, no capex)
Cap Rate
Cap Rate = NOI / Purchase Price × 100
Cash-on-Cash
Cash-on-Cash = Annual After-Debt Cash Flow / Total Cash Invested × 100
DSCR
DSCR = NOI / Annual Mortgage Payments
Cap rates vary enormously by market and property type. In major urban markets, 4–5% cap rates are common for stabilised multifamily. Secondary markets might see 6–8%. Higher cap rates imply more risk or lower growth expectations. A 'good' cap rate depends on your alternatives and risk tolerance, not an absolute number.
NOI excludes debt service (mortgage payments), income taxes, and capital expenditures. It measures the property's intrinsic earning power. Cash flow is what actually lands in your bank account after paying the mortgage. Two investors can buy the same property, get identical NOIs, and have vastly different cash flows due to different financing structures.
Debt Service Coverage Ratio = NOI / annual mortgage payment. It measures whether the property generates enough income to cover its loan payments. A DSCR of 1.0 means income exactly covers debt; below 1.0 means you're subsidising the property from other income. Most commercial lenders require DSCR ≥ 1.25, meaning NOI is 25% more than required for debt payments.
US residential real estate has averaged roughly 3–4% annual appreciation nationally, but this masks huge geographic variation. Use local market data if you have it. The 3% default is roughly in line with long-run inflation. Note that even flat appreciation (0%) can still produce acceptable returns if cash flow is strong.