The example deal
Every calculation in this guide uses the same property so you can follow the math from start to finish. This is a single family rental in a Midwest market with the following numbers:
| Input | Value |
|---|---|
| Purchase price | $150,000 |
| Loan amount (80% LTV) | $120,000 |
| Down payment | $30,000 |
| Closing costs | $5,000 |
| Rehab budget | $25,000 |
| After repair value (ARV) | $195,000 |
| Monthly rent | $1,150 |
| Interest rate | 7.25%, 30 year fixed |
| Bedrooms | 3 |
Total cash invested is down payment ($30,000) plus closing costs ($5,000) plus rehab ($25,000), which equals $60,000. This is the denominator for every return calculation. The loan amount is the bank's money, not yours.
Dimension 1: Equity position at close
Equity position tells you whether you are underwater on day one. It answers a simple question: if you had to sell this property right after rehab, would you walk away with money or write a check?
All in cost: Purchase price ($150,000) + closing costs ($5,000) + rehab ($25,000) = $180,000. ARV ($195,000) minus all in cost ($180,000) = $15,000 equity captured, or 7.7% of ARV. Your loan balance is $120,000, so your total equity position is $195,000 minus $120,000 = $75,000.
Equity at close is your margin of safety. If the market drops 8%, a deal with 7.7% equity capture is underwater. Strong BRRR deals target 20% to 30% equity capture so they survive a downturn and still qualify for a cash out refinance.
Dimension 2: Monthly cash flow
Cash flow is what keeps you solvent between tenants, during repairs, and through rate hikes. A property that burns cash every month will eventually force a sale at the worst possible time.
| Monthly Item | Amount |
|---|---|
| Gross rent | $1,150 |
| Principal and interest ($120K at 7.25%, 30yr) | ($818) |
| Property taxes | ($125) |
| Insurance | ($85) |
| Property management (8%) | ($92) |
| Maintenance reserve (5%) | ($58) |
| Vacancy reserve (5%) | ($58) |
| CapEx reserve (3%) | ($35) |
| Net monthly cash flow | ($121) |
This deal produces negative $121 per month in cash flow. That is negative $1,452 per year. Before you stop reading, remember that cash flow is only one of five dimensions. A deal can fail on cash flow but still be worth pursuing if the equity capture and velocity are strong enough. But the hard gates section below explains when negative cash flow is a dealbreaker.
Dimension 3: Cash on cash return
A negative 2.4% cash on cash return means you are paying $1,452 per year for the privilege of owning this property. For a buy and hold investor, this is a failing grade. For a BRRR investor who plans to refinance and recover capital within 6 months, the CoC on current financing is less important than the post refi numbers.
Dimension 4: Debt service coverage ratio
Annual NOI: $13,800 gross rent minus $5,436 operating expenses (taxes, insurance, PM, maintenance, vacancy, CapEx) = $8,364. Annual debt service: $818 x 12 = $9,816. DSCR = $8,364 / $9,816 = 0.85. A DSCR below 1.0 means the property cannot cover its own debt. Lenders typically require 1.25 for DSCR loans. This deal would not qualify.
Dimension 5: Capital velocity
Capital velocity measures how fast your cash comes back to you. A deal that locks up $60,000 for ten years is fundamentally different from one that returns $55,000 in six months so you can redeploy it.
Refinance at 75% of ARV: 75% of $195,000 = $146,250 new loan. Minus existing $120,000 balance = $26,250 cash back. Velocity: $26,250 / $60,000 = 43.8% capital recovery. You still have $33,750 locked in the deal. This is a SLOW velocity rating (below 80% recovery).
Hard gates: automatic FAIL
Hard gates are binary. If any one of these conditions is true, the deal fails regardless of how strong the other metrics look. No amount of equity capture compensates for a property that drains your bank account every month with no path to recovery.
This deal fails two of three hard gates (cash flow and CoC). In a disciplined underwriting system, analysis stops here. But understanding why it fails, and what would need to change, is where the real education happens.
Soft gates: score penalties
Soft gates do not kill a deal outright. They reduce the overall score, flagging risk areas that might become problems during the hold period.
IDEAL score: the complete picture
No single metric tells the whole story. IDEAL scoring evaluates five dimensions of return, each capturing something the others miss.
| Component | What It Measures | Our Example |
|---|---|---|
| I Income | Cash flow after all expenses | ($121)/mo, ($1,452)/yr |
| D Debt paydown | Tenant pays off your mortgage principal | $2,400/yr |
| E Equity capture | Spread between all in cost and ARV | $15,000 (7.7%) |
| A Appreciation | Long term market value growth | ~$5,850/yr at 3% |
| L Leverage | $60K controls a $195K asset | 3.25x leverage |
Even though cash flow is negative, the other four components produce $23,250 in value. Total first year return including all five IDEAL components: approximately $21,798, or a 36.3% total return on the $60,000 invested. That is the difference between looking at cash flow alone and looking at the complete picture. However, a strong IDEAL score does not rescue a deal that fails hard gates. The gates exist to prevent you from buying properties that drain cash, regardless of paper equity gains.
Velocity rating
Velocity rating classifies how quickly your capital returns after a refinance. ROCKET means 95%+ capital recovered with rehab at or below $50,000: nearly all your cash back, ready to buy the next deal immediately. STEADY means 80%+ recovered with rehab at or below $75,000: most cash back, one or two deals per year pace. SLOW means below 80% recovery: significant capital locked up, slower portfolio growth.
Our example recovers 43.8% of capital, a SLOW rating. To hit ROCKET, you would need a lower purchase price or higher ARV so the refi covers nearly all of your cash invested.
Quick deal scorecard
Here is every metric for our example property in one table.
| Metric | Value | Gate | Result |
|---|---|---|---|
| Equity at close | $15,000 (7.7%) | Hard: must be positive | PASS |
| Monthly cash flow | ($121) | Hard: must be positive | FAIL |
| Cash on cash return | negative 2.4% | Hard: minimum 15% | FAIL |
| DSCR | 0.85 | Lender threshold: 1.25 | FAIL |
| Capital velocity | 43.8% | ROCKET requires 95%+ | SLOW |
| Rehab budget | $25,000 | Soft: penalty above $75K | PASS |
| IDEAL total return | $21,798 (36.3%) | Informational | Strong |
| Overall verdict | Fails 2 of 3 hard gates | FAIL | |
What would make this deal work
A deal is not inherently good or bad. It is good or bad at a specific price, rate, and rent. Change any one variable and the scorecard shifts. At $130,000 purchase instead of $150,000, P&I drops from $818 to $709 and cash flow goes positive. At $1,350/month rent instead of $1,150, cash flow becomes positive $87. At 5.5% interest instead of 7.25%, P&I drops to $681 and cash flow turns positive. Seller financing at 5% with interest only payments could drop debt service to $650/month. The deal that fails today passes tomorrow if you negotiate the right terms.
Common mistakes in deal analysis
How DoorVault runs deal analysis
DoorVault's deal analyzer runs all five dimensions automatically when you paste a property address or Zillow URL. It pulls comparable rents, insurance estimates, and market data, then scores the deal against your personal underwriting profile.