Deal Analysis
Frameworks

Rules of thumb (screening, not decision)

• 1% Rule. Monthly rent ≥ 1% of purchase price. In 2026, realistic in 20% of US markets (Midwest, Southeast tertiary). Fails in most primary metros.
• 2% Rule. Legacy high-cashflow benchmark. Rare today; typically signals class C/D neighborhoods with management risk.
• 50% Rule. Long-run operating expenses (ex-debt) average 50% of gross rent. Fast screen, then validate with actual P&L.
• 70% Rule (flipping). MAO = ARV × 0.70 − rehab. Leaves 30% for costs, carry, and profit.
• 70% ARV BRRRR. All-in ≤ 70% ARV → refi at 75% returns capital.
• GRM (Gross Rent Multiplier). Price ÷ annual gross rent. ≤ 12 for positive-cashflow feasibility, ≤ 8 for high yield.

Cap rate

Cap Rate = NOI / Value

Used for:
  - Comparing similar properties in same market
  - Pricing NNN single-tenant
  - Pricing multifamily, office, retail, industrial
  - Sanity-checking against market comps

NOT used for:
  - Residential 1-4 unit owner-occupied math
  - Leveraged return analysis (use cash-on-cash or IRR)
  - Fix-and-flip deals

Cap rate is not a return you earn — it's a price point.
Leverage adds or subtracts from your actual return
vs. the unleveraged cap rate.

Spread vs. loan rate:
  Cap 6.0% − Loan rate 6.5% = Negative leverage (−0.5%)
  Cap 7.5% − Loan rate 6.5% = Positive leverage (+1.0%)
  Positive leverage amplifies cash-on-cash above cap rate.

Cash-on-cash return

CoC = Annual Cash Flow / Total Cash Invested

Annual Cash Flow = NOI − Debt Service
Total Cash Invested = Down payment + Closing + Rehab + Reserves

Targets by strategy:
  SFR turnkey:               6-10%
  BRRRR post-refi:           infinite (0 capital left)
  Small multifamily value-add: 10-15% stabilized
  Syndication LP:             6-8% pref
  Heavy value-add:           8-12% at stabilization

CoC captures levered cashflow yield.
Does NOT capture appreciation, principal paydown, tax benefit.

IRR and equity multiple

• IRR (Internal Rate of Return). Time-weighted annualized return over hold period. Combines cashflow, appreciation, and principal paydown. Institutional LP target 12–18% net.
• Equity multiple (EM). Total dollars returned ÷ dollars invested. 1.8–2.2x over 5-year hold is typical value-add; 1.5x for core, 2.5x+ for opportunistic.
• MOIC (Multiple on Invested Capital). Same as equity multiple. Private equity terminology.
• Preferred return. Typically 7–8% annual, cumulative, before GP shares in profits. LP-protective waterfall feature.

DSCR

DSCR = NOI / Annual Debt Service

Lender minimums:
  Multifamily agency:     1.20-1.25x
  DSCR loan rental:       1.10-1.25x
  Commercial stabilized:   1.25-1.35x
  Hospitality:             1.40x+
  Value-add bridge:        often waived at entry,
                           1.25x required at exit refi

Stress test DSCR at:
  Rent −5%
  Vacancy +5%
  Rate +1% (on variable) or at exit-refi projected rate
  Opex +10% (capex reserves, insurance increases)

NOI construction — the details matter

Gross Potential Rent (GPR) = all units × market rent × 12
Less: Vacancy allowance           (5-10% SFR, 8-12% small multi,
                                   15%+ class C/D)
Less: Credit loss / bad debt      (1-3% typical)
Plus: Other income                (laundry, parking, storage,
                                   late fees, tenant insurance,
                                   pet rent, application fees)
= Effective Gross Income (EGI)

Less: Property taxes
Less: Insurance
Less: Utilities (landlord-paid)
Less: Repairs and maintenance
Less: Turnover costs
Less: Management (8-10% self-managed shadow, 10-12% hired)
Less: Administrative + legal
Less: Marketing / leasing
Less: Reserves for replacement   ($250-500/unit/year SFR,
                                   $350-600/unit multifamily,
                                   $0.10-0.30/sqft CRE)
= Net Operating Income (NOI)

Debt service is NOT in NOI.
Capex is NOT in NOI.
Depreciation is NOT in NOI.

Pro forma vs. stabilized

• Pro forma NOI. Hypothetical "what this could be" NOI at market rents and stabilized vacancy. Seller’s version invariably optimistic.
• T12 (Trailing 12 months) NOI. Actual last 12 months of collected rent minus actual expenses. Ground truth. Always demand this.
• T3 (Trailing 3 months annualized). Recent momentum. Lenders use both T3 and T12.
• Stabilized NOI. Post-value-add projected NOI. Basis for return modeling, but riskier than T12.

Rule: buy on T12, underwrite to stabilized. Never pay for stabilized NOI that requires you to execute a value-add plan. That’s the upside you earn, not the price you pay.

Sensitivity analysis

Run a sensitivity table before every deal:

                Base     Stress    Kill
Rent:          $1,800   $1,710   $1,620   (−5%, −10%)
Vacancy:          5%       8%      12%
Cap rate exit:  6.0%    6.5%     7.0%   (+50, +100 bps)
Interest rate:  6.5%    7.0%     8.0%
Rehab cost:    $40k     $50k     $60k
Hold period:    5 yr    7 yr     10 yr

Deal must pencil at Stress case.
Kill case is the "worst we're willing to accept."
If Kill case is still cashflow-positive, it's a durable deal.

Tools

• DealCheck — SFR and small multifamily analyzer
• BiggerPockets calculators — free for basic, pro $390/year
• Propstream — acquisition + analysis combined
• REI/kit — institutional multifamily underwriting
• Excel/Google Sheets — ultimate flexibility, slower
• Argus — institutional CRE modeling ($5k+/year)

Common pitfalls

• Optimistic rents. "Rentometer says $2,200" without validating actual leases. Always validate with executed lease comps.
• Ignored capex reserves. Makes the pro forma look great, destroys year-5 cash when HVAC and roof both fail. Always include reserves.
• Exit cap too aggressive. Buying at 6% cap, exiting at 5.5% cap in pro forma. Cap rate compression is a 20-year tailwind that may reverse. Add 50–100 bps margin.
• Single scenario modeling. Pro forma looks great at base case. Stress case destroys IRR. Model stress, not just base.
• Mixing up NOI and cashflow. NOI is pre-debt. Cashflow is post-debt. Don’t compare levered cashflow to cap rate or unlevered NOI.
• Ignoring taxes. Property tax reassessment at sale (CA Prop 13, reassessable states). Seller’s 1990 basis doesn’t transfer. Budget new tax bill at market value × current rate.
• Management fee self-delusion. "I’ll self-manage for free." Your time has a cost. Include 8–10% management in underwriting even if you intend to self-manage.
• Missing line items. Trash, pest control, lawn, snow removal, HOA, utility base charges, licensing. Forgotten operating expenses compress NOI by 10–20%.