How to Analyze a Rental Deal: ROI, Cap Rate, and DSCR

Most rental deal posts throw formulas at you. This one walks through a real example with real numbers.

You will see exactly what happens from purchase price to debt payment to monthly cash flow, and how that turns into cap rate, DSCR, and cash-on-cash return.

The example deal

Let us underwrite a 16-unit property with these assumptions:

Purchase price: $2,300,000
Down payment: 30 percent ($690,000)
Loan amount: $1,610,000
Interest rate: 6.00 percent
Amortization: 25 years
Gross monthly rent (all units combined): $25,000
Expense ratio: 33 percent (taxes, insurance, utilities, maintenance, and more)

That means average rent per unit is about $1,562.50 per month.

Step 1) Financing: what you borrow and what you pay

You put down $690,000 and borrow $1,610,000.

At 6 percent over 25 years, monthly principal and interest is about:

$10,373 per month
$124,479 per year

That annual payment is your debt service for DSCR.

Step 2) Income and expenses: getting to NOI

Start with gross rent:

Gross monthly income: $25,000
Gross annual income: $300,000

Now apply the 33 percent expense ratio:

Annual operating expenses: $99,000
Monthly operating expenses: $8,250

So your NOI (net operating income) is:

Monthly NOI: $16,750
Annual NOI: $201,000

Plain English: the property produces $201,000 per year before loan payments.

Step 3) DSCR: does income cover debt comfortably?

DSCR formula:

DSCR = NOI / Annual Debt Service

Using our numbers:

NOI = $201,000
Debt service = $124,479

DSCR = 1.61x

That is strong coverage in many lending scenarios. As a reference point, many lenders often look for around 1.25x.

Step 4) Cap rate and cash flow

Cap rate

Cap rate formula:

Cap Rate = NOI / Purchase Price

$201,000 / $2,300,000 = 8.74 percent cap rate

Cap rate ignores financing. It tells you what the asset itself is producing.

Cash flow (after debt)

Monthly cash flow after debt service:

NOI: $16,750 per month
Mortgage payment: $10,373 per month
Net cash flow: $6,377 per month

Annual cash flow:

$76,521 per year

This is the money left after operating expenses and mortgage payments (before taxes).

Step 5) Cash-on-cash return

Cash-on-cash formula:

CoC = Annual Pre-Tax Cash Flow / Cash Invested

Using down payment as cash invested:

Annual cash flow: $76,521
Cash invested: $690,000

CoC return = 11.1 percent

So in this base case, the deal throws off roughly an 11.1 percent cash return on the down payment.

What if you hire a management company?

If management is $100 per door per month on 16 units:

Management fee = $1,600 per month
Management fee = $19,200 per year

Now annual operating expenses become:

$99,000 + $19,200 = $118,200

Updated metrics:

Annual NOI: $181,800
Monthly NOI: $15,150
Monthly cash flow after debt: $4,777
Annual cash flow: $57,321
DSCR: 1.46x
Cap rate: 7.90 percent
CoC: 8.3 percent

Plain English: you pay $1,600 per month to offload management work, and monthly cash flow drops by that same amount.

Total return view (not just cash flow)

Cash flow is only part of return. You also get:

Principal paydown (loan balance drops over time)
Appreciation (if property value rises)

Assume:

Year-1 principal paydown: about $28,659
Annual appreciation: 3 percent on $2.3M = $69,000

Then rough year-1 total return looks like:

Self-managed base case

Cash flow: $76,521
Principal paydown: $28,659
Appreciation: $69,000
Total: $174,180
Total return on $690,000 cash: about 25.2 percent

With third-party management

Cash flow: $57,321
Principal paydown: $28,659
Appreciation: $69,000
Total: $154,980
Total return on $690,000 cash: about 22.5 percent

Important: appreciation is not guaranteed, and it is not immediate spendable cash. It is still useful for long-term return framing.

What this example tells you

This is exactly why one metric is never enough:

Cap rate tells you asset yield.
DSCR tells you debt safety.
Cash flow tells you monthly reality.
CoC tells you how hard invested cash is working.
Total return gives the bigger long-term picture.

A deal can look great on cap rate and still feel tight on cash flow if debt is heavy. Or it can cash flow well while still relying on aggressive appreciation assumptions.

Run this exact deal in the calculators

Use these pages to model this scenario and tweak assumptions:

If you want help standardizing underwriting across your portfolio, Book Demo or See Pricing.

FAQ

Which metric matters most?

No single metric is enough. Use cap rate, CoC, DSCR, cash flow, and total return together.

What is a healthy DSCR target?

Many lenders look for around 1.25x, but exact requirements vary.

Why can cap rate look good while cash flow is weak?

Because financing terms can compress monthly and annual cash flow.

Should rehab be included in total cash invested?

Yes. Excluding rehab usually overstates returns.