20 Questions in This Hub
- What does it mean to underwrite a rental property?
- What is the 1% rule in rental property?
- What is the 2% rule?
- What is the 50% rule?
- What is cap rate and how do I calculate it?
- What is a good cap rate for rental property?
- What is cash-on-cash return and how do I calculate it?
- What is a good cash-on-cash return?
- What is a DSCR pre-check and why does it matter?
- How do I estimate operating expenses on a deal?
- What is GRM (gross rent multiplier)?
- What is the difference between NOI and cash flow?
- How do I build a defensible pro forma?
- How do I stress-test a deal before buying?
- What should I check during due diligence?
- When should I walk away from a deal?
- What is IRR and when should I use it for rental analysis?
- When do rules of thumb (1%, 50%) replace real underwriting?
- Cap rate vs cash-on-cash: which matters more?
- How does DoorVault analyze a deal?
1. What does it mean to underwrite a rental property? #
Underwriting a rental is the process of turning a listing into an opinion of value and risk. You estimate gross income, subtract realistic operating expenses to get NOI, divide by your cap-rate target to get a maximum offer, and validate that the financing math (DSCR at the lender's rate) supports the loan you need. Underwrite enough deals and the inputs become muscle memory.
What underwriting is not: building a 47-tab Excel model that the seller will never see. The right model fits on one page, has six inputs, and gives you a max offer in five minutes. The rest is verifying the assumptions: pulling a 1007 rent comp, running insurance quotes, checking the actual tax bill (not the seller's homestead-discounted bill), and confirming HOA. The discipline is doing the underwrite before you tour, not after you fall in love.
2. What is the 1% rule in rental property? #
The 1% rule says monthly gross rent should equal at least 1% of the purchase price. A $150,000 property should rent for at least $1,500/month to clear the rule. It is a fast screen, not a final underwrite. The 1% rule was calibrated when rates were 5 to 6%; at today's 7.5 to 9% rental loan rates, deals that just barely clear 1% often have negative cash flow.
Use the 1% rule to filter, not to decide. A market that consistently produces 1.0%+ deals (much of the Midwest and Southeast) is one where you can build a cash-flowing portfolio. A market where 0.6% is normal (much of the West Coast and Northeast) is an appreciation play and requires different underwriting (cap rate, IRR, exit multiple). Stop applying the 1% rule in markets it was never designed for.
3. What is the 2% rule? #
The 2% rule says monthly gross rent should equal 2% of purchase price. A $50,000 property renting for $1,000/month clears 2%. It exists almost exclusively in tertiary markets, working-class neighborhoods, and mobile-home parks. A 2% deal looks irresistible on a spreadsheet and is often a trap: high vacancy, high turnover cost, high maintenance, slow appreciation.
Real 2% deals can work, but only with operator-grade execution: a strong PM relationship, fast turn turnaround, conservative tenant screening, and reserve buckets sized for actual operating reality (not the spreadsheet's 5% maintenance assumption). Investors who love the 2% rule on paper and ignore the operating reality are the ones who learn the hard way that gross rent is not net cash flow.
4. What is the 50% rule? #
The 50% rule estimates operating expenses (excluding debt service) at 50% of gross rent. On a $1,800/month rental, expect about $900/month in operating costs (taxes, insurance, vacancy, maintenance, capex, management, utilities if any) and about $900/month available for debt service and cash flow.
The 50% rule is a quick screen, not a substitute for line-item budgeting. In low-tax markets with newer properties, real expenses can run 35 to 40%; in older buildings, high-tax states, or on Class C properties, expenses run 55 to 65%. Always validate with line-item budgeting on the actual property: pull the actual tax bill, get an insurance quote, estimate management at 8 to 10% of rent, and budget capex on a per-property age-based schedule. The 50% rule keeps you from chasing deals where the gross rent looks great and the net does not exist.
5. What is cap rate and how do I calculate it? #
Cap rate is net operating income (NOI) divided by purchase price, expressed as a percentage. NOI is gross rent minus operating expenses, before debt service and before income tax. A property with $24,000 annual gross rent, $9,600 in operating expenses, and a $200,000 purchase price has NOI of $14,400 and a cap rate of 7.2%.
What cap rate excludes: financing (debt service is below the NOI line), taxes (income tax, not property tax; property tax is in opex), depreciation, capital improvements, and any per-unit reserves. Cap rate is a property-level yield metric used to compare deals across markets without financing noise. A 7.2% cap rate property in Memphis and a 4.5% cap rate property in San Diego are both correctly priced for their markets; the cap-rate spread reflects rent growth, vacancy risk, and exit liquidity assumptions.
6. What is a good cap rate for rental property? #
Cap rate ranges by market and asset class. As of 2026: stabilized single-family rentals in Midwest secondary markets typically trade at 6.5% to 8.5% cap. Sun Belt small multifamily 5.5% to 7.5%. Coastal metro single-family 3.5% to 5.5%. Class A urban multi 4.0% to 5.5%. Class C tertiary single-family 8.0% to 11.0%.
A 'good' cap rate is one that exceeds your target spread over your borrowing rate. Rule of thumb: cap rate should beat the borrowing rate by at least 150 to 250 basis points (positive leverage). At a 7.5% DSCR rate, you want a 9.0%+ cap rate to generate meaningful cash-on-cash. A cap rate below the borrowing rate (negative leverage) means the property loses money on a financed basis even though it shows positive NOI; only buy negative-leverage deals if the appreciation thesis is unusually strong.
7. What is cash-on-cash return and how do I calculate it? #
Cash-on-cash return (CoC) is annual pre-tax cash flow divided by total cash invested, expressed as a percentage. Total cash invested includes down payment, closing costs, rehab, and any reserves you put in at acquisition. Annual cash flow is NOI minus annual debt service.
Example: $50,000 down + $7,000 closing + $8,000 rehab = $65,000 cash in. NOI is $14,400, debt service on a $150,000 loan at 8% is $13,200, leaving $1,200 of cash flow. CoC is 1.85%. That deal is barely profitable on cash and is probably an appreciation bet, not a cash-flow play. CoC measures investor-level yield (what your money earns), not property-level yield (what the property earns). Use CoC for compare-the-deal decisions; use cap rate for compare-the-market decisions.
8. What is a good cash-on-cash return? #
Most successful long-term rental investors target 8 to 12% cash-on-cash on a stabilized buy-and-hold. Below 6% is hard to justify versus passive index investing. Above 15% almost always reflects either an underestimated expense line, an aggressive rent assumption, or a value-add project that has not been executed yet.
BRRR deals after a successful refi can show 30%+ CoC because the cash invested drops to whatever you left in the deal. That number is technically correct but often misleading: if you only left $5,000 in the deal and that returns 40%, the absolute dollar cash flow is small. Always look at CoC and absolute monthly cash flow together; both have to make sense for the deal to be a real win.
9. What is a DSCR pre-check and why does it matter? #
A DSCR pre-check is a quick test of whether the deal will pass the lender's DSCR minimum at the rate you will actually get. Take projected gross monthly rent (from a 1007 comp, not a wishful number) and divide by total monthly PITIA at the proposed loan terms. If the result is below 1.10, the financing is at risk and you need to lower the loan amount, raise the rent assumption, or skip the deal.
DSCR pre-checking before you write an offer is the single most underused move in rental analysis. Investors who skip it write offers based on cap rate, get the offer accepted, and discover at lender intake that DSCR is 0.95 because the appraiser's market rent came in $200 below their assumption. The deal is dead in inspection period and they lose the option fee. A 30-second DSCR pre-check at the screening stage saves weeks downstream.
10. How do I estimate operating expenses on a deal? #
Build operating expenses line by line, not as a percentage. Categories and typical ranges per month on a $1,800-rent SFR: property taxes (use the actual reassessed-after-sale bill from the county website, not the seller's homestead bill), insurance ($75 to $200 depending on state and age), property management (8 to 10% of rent), vacancy reserve (5 to 8% of rent), maintenance ($75 to $150), capex reserve ($100 to $200), HOA if any, utilities if landlord-paid, landscaping, pest control, licensing.
On a typical $1,800 SFR, total opex usually lands at $700 to $950/month, which is the source of the 50% rule. The line-by-line approach is what catches the deal-killers (a $4,800 annual tax bill, a $2,400 HOA, $200/month landlord-paid water) that the rule of thumb hides. Always pull the real tax bill and get a real insurance quote before signing a contract.
11. What is GRM (gross rent multiplier)? #
GRM is purchase price divided by annual gross rent. A $200,000 property with $24,000 annual rent has a GRM of 8.3. Lower GRM means cheaper price relative to rent (the property pencils faster). It is the quickest screening metric in deal analysis, faster than the 1% rule because you can compute it in your head.
GRM ranges by market: 6 to 9 in Midwest and Southeast, 12 to 18 on coasts, 20+ in the most expensive metros. The limitation is that GRM ignores expenses entirely; a high-tax, high-HOA, landlord-pays-utilities property with GRM of 7 may have worse cash flow than a low-tax, no-HOA property with GRM of 9. Use GRM to filter the list, then move to NOI and cap rate to choose.
12. What is the difference between NOI and cash flow? #
NOI is gross rent minus operating expenses, before debt service. It is a property-level metric used to compute cap rate. NOI is what you would earn if you bought the property cash. Cash flow is NOI minus debt service, after the loan payment. It is an investor-level metric used to compute cash-on-cash return.
On a $14,400 NOI deal with $13,200 of annual debt service, NOI is $14,400 and cash flow is $1,200. Same deal, two different numbers. The most common analysis mistake is conflating them: 'this property produces $14,400/year' is correct only on an unleveraged basis, and almost no investor buys cash. Always quote NOI for property comparisons and cash flow for investor decisions.
13. How do I build a defensible pro forma? #
Three rules. First, gross income should be the lower of (current rent) and (1007 market rent comp). Do not pencil to a rent number you cannot prove from comps. Second, operating expenses should be line-by-line at the actual numbers (real tax bill, real insurance quote, real HOA, real management quote), not a 50% rule estimate. Third, reserves for vacancy, maintenance, and capex go in even if the property is fully occupied today.
What kills a pro forma in due diligence: stretching market rent to make DSCR work, using the seller's homestead-discounted tax bill, omitting capex reserves, and skipping any line item the seller's pro forma omitted (utilities, HOA, lawn). The pro forma you bring to a lender or partner should be defensible at every line. If a line item would not survive five minutes of questions, fix it before you submit.
14. How do I stress-test a deal before buying? #
Run three sensitivity scenarios. Vacancy stress: model 12 weeks of vacancy in year one (tenant turnover plus turn time). Rate stress: model the loan at 1 point above your locked rate to confirm DSCR still clears at refi or rate reset. Expense stress: model property tax up 15% (next reassessment), insurance up 25% (current trajectory in many states), and a $4,000 capex hit (HVAC or roof in year one).
If the deal still cash flows positive across all three stresses, it is a strong buy. If two of the three break it, you are buying a thin deal that requires perfect operating execution. If any single stress kills cash flow, you are paying too much. Stress testing in five extra minutes up front prevents most of the regret deals investors talk about a year later.
15. What should I check during due diligence? #
Five categories. Property condition: inspection, sewer scope, roof age, HVAC age, panel size. Title: clear of liens, no boundary disputes, no encroachments, no open permits. Lease and tenant if occupied: signed lease, security deposit verified, rent ledger, past two years of payment history.
Operating numbers: actual tax bill (county assessor site), insurance quote in writing, HOA statement and rules, utility bills if landlord-paid, last 12 months of any trailing financials. Market: re-pull comps in the week of close, recheck rent comps, confirm permit and zoning rules have not changed for STR or ADU plans. The investors who skip due diligence on operating numbers are the ones who close on a property whose true tax bill is $1,800 higher than the seller's homestead bill suggested.
16. When should I walk away from a deal? #
Walk when any of these are true. DSCR pre-check fails at the lender's actual rate and you cannot lower price or raise rent. Operating expenses came in 20%+ over your underwrite (true tax bill blew past assumption, insurance quote came in higher, HOA found in disclosures). Inspection turned up structural, sewer, or environmental that the seller will not credit you for.
Comps no longer support your ARV when re-pulled the week of close. The seller will not provide actual operating data after asking twice. The discipline of walking is the single most underrated skill in rental investing. The best operators walk from 80%+ of the deals they put under contract. The worst ones close on 100% of theirs and call it 'commitment.'
17. What is IRR and when should I use it for rental analysis? #
Internal Rate of Return (IRR) is the annualized return that includes cash flow plus appreciation plus principal paydown plus tax benefits, modeled across the full hold period and exit. It accounts for the time value of money and is the most complete return metric for comparing deals with different hold periods or exit assumptions.
IRR matters most for value-add, BRRR, and short-hold deals where the bulk of return is the exit (refi or sale), not annual cash flow. For long-term buy-and-hold rentals, cash-on-cash and cap rate usually tell you what you need; IRR rarely changes the decision. Modeling IRR requires assumptions about future rent growth, future cap rate at exit, and future vacancy, which are uncertain enough that IRR ranges of 12 to 20% on the same deal are common depending on inputs. Use IRR as one of three metrics, not the only one.
18. When do rules of thumb (1%, 50%) replace real underwriting? #
Never as a final underwrite. Always as a screening filter. Rules of thumb let you process 50 listings in an evening and pick the 5 worth modeling line by line the next morning. They are calibrated for typical Class B SFR in cash-flow markets and break in any of these conditions: high-tax states, HOA-heavy properties, landlord-paid utilities, condos, multi-unit with shared infrastructure, short-term rentals, anything in coastal metros.
The right workflow is: rule-of-thumb screen to filter, real line-by-line underwrite to decide, full pro forma plus stress test before offer. Investors who skip step 1 burn weekends; investors who skip steps 2 and 3 buy bad deals. The 5-minute screen exists to protect the 50-minute model.
19. Cap rate vs cash-on-cash: which matters more? #
Both, for different decisions. Cap rate is unleveraged and lets you compare deals across markets without financing noise. Cash-on-cash is leveraged and tells you what your invested money actually earns. The same property has one cap rate and many cash-on-cash returns depending on financing.
Use cap rate when you are choosing a market or comparing deals across financing structures. Use cash-on-cash when you are deciding whether to deploy capital here vs another deal vs another asset class. Most operators look at both: a property with a 7.5% cap rate and a 10% cash-on-cash at 75% LTV is a typical good buy; a property with a 4% cap rate and a 15% cash-on-cash at 90% LTV (impossible on investment, but illustrative) is over-leveraged. The two metrics together catch what either one alone misses.
20. How does DoorVault analyze a deal? #
Paste a Zillow or Redfin URL into Knox or upload a flyer. DoorVault pulls address, price, beds/baths, and square footage; estimates ARV from sold comps; pulls a market rent estimate; runs a default operating expense schedule based on state and property age; and returns NOI, cap rate, cash-on-cash, and a DSCR pre-check at current DSCR rates. The output is a one-page underwrite, not a 47-tab spreadsheet.
What it does not replace: walking the property, getting a real insurance quote, pulling the actual tax bill from the assessor, and stress-testing the deal at higher vacancy and rates. The analyzer is a screen, not a final decision. The point is to spend the saved time on the 5 deals worth real diligence instead of evenly across 50 deals that mostly do not.