The Pro's Playbook: Analyzing Deals in Seconds with the REI Prime Calculator

Show Notes

Episode 100. We're celebrating with the skill that separates investors who build wealth from investors who buy headaches: deal analysis. I look at 35-40 deals a week. Most get eliminated in under 60 seconds. Not because I'm a genius — because I've got a system that runs five metrics in sequence, each one filtering out bad deals faster than the last.

Here's the playbook.

Start with the 1% Rule — The 10-Second Filter

The 1% rule is the simplest screen in real estate investing. Monthly rent should equal at least 1% of the purchase price. That's it.

Property costs $185,000. Monthly rent needs to be at least $1,850.

Does the listing show $1,400/month rent on a $185,000 price tag? That's 0.76%. Move on. Don't call the agent. Skip the showing. Save yourself the spreadsheet. It failed the first filter.

The 1% rule won't tell you if a deal is good. It tells you if a deal is worth spending another 5 minutes on. In markets like Columbus, Memphis, and Birmingham, you'll find properties hitting 1%. In San Francisco or Miami? Forget it — the rule eliminates practically everything, which is useful information about the market.

NOI — The Foundation

Every other metric builds on NOI. If your NOI is wrong, everything downstream is wrong.

NOI = Gross Income − Operating Expenses

I use conservative defaults: 8% vacancy, 10% CapEx, 5% maintenance, 8% management, actual taxes and insurance. No debt service — NOI lives above the financing line.

Example: a 4-unit building in Indianapolis. Gross monthly rent: $4,200 ($1,050/unit). Annual gross income: $50,400.

NOI: $28,776.

That's the property's earning power before debt. Every calculation after this depends on $28,776 being accurate.

Cap Rate — What It Tells You

Cap rate = NOI ÷ Purchase Price. It answers one question: what return does the market pay for income in this location?

Our Indianapolis 4-plex is listed at $340,000.

Cap rate: $28,776 ÷ $340,000 = 8.46%

In Indianapolis, that's solid. The market average for small multifamily runs 7-9%. If this deal came in at 5.5%, I'd wonder what's wrong — is it in a tough neighborhood? Are the rents inflated? Is there deferred maintenance that makes the real NOI lower?

But here's the thing: cap rate doesn't tell you if the deal makes money for YOU. It doesn't account for your financing, your down payment, or your loan terms. Two investors buying the same property at the same cap rate can have wildly different returns depending on how they financed it.

Use cap rate to compare assets in the same market. Use cash-on-cash to decide if it works for your wallet.

Cash-on-Cash — Your Actual Return

Cash-on-cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested.

This is the metric that answers: what am I earning on the dollars I actually put in?

Same 4-plex. Purchase: $340,000. Down payment (25%): $85,000. Closing costs: $6,800. Total cash in: $91,800.

Loan: $255,000 at 7.25%, 30-year. Annual debt service: $20,892.

Annual cash flow: $28,776 (NOI) − $20,892 (debt service) = $7,884.

Cash-on-cash: $7,884 ÷ $91,800 = 8.59%.

I want 8%+ cash-on-cash on multifamily in the Midwest. This deal clears the bar. In a 7.25% rate environment, hitting 8.59% cash-on-cash means the property fundamentals are strong enough to absorb the higher debt cost.

DSCR — The Safety Check

DSCR — Debt Service Coverage Ratio — is the lender's favorite metric. And it should be yours too.

DSCR = NOI ÷ Annual Debt Service

Our deal: $28,776 ÷ $20,892 = 1.38.

Translation: the property earns 38% more than it needs to cover the mortgage. That's comfortable. Lenders typically want 1.20 minimum for conventional loans, 1.25 for DSCR-specific loan products.

Below 1.0? The property doesn't cover its own debt. You're feeding it cash every month from your personal account. That's not investing — that's subsidizing.

Between 1.0 and 1.2? Tight. One vacancy or one major repair wipes out your cushion.

Above 1.25? You've got margin. Unexpected expenses don't sink you.

The Full Sequence

Here's how I run it, every time:

1. 1% rule (10 seconds): passes or fails. If it fails, I'm done.
2. NOI (2 minutes): build the operating budget with conservative assumptions.
3. Cap rate (10 seconds): does this match the market? Red flags if way above or below average.
4. Cash-on-cash (1 minute): does this meet my minimum return threshold with my actual financing terms?
5. DSCR (10 seconds): is there enough cushion to survive a bad quarter?

Five metrics. Under 5 minutes. Most deals die at step 1 or step 2. The ones that survive all five get a property inspection and a deeper dive.

The Indianapolis Deal — Verdict

• 1% rule: $4,200 rent ÷ $340,000 = 1.24%. Passes.
• NOI: $28,776. Solid.
• Cap rate: 8.46%. In range for the market.
• Cash-on-cash: 8.59%. Above my 8% threshold.
• DSCR: 1.38. Comfortable margin.

This deal gets a showing. Not because one metric looks good — because all five clear the bar simultaneously. That's how you avoid buying a property that looks great on paper and bleeds cash in reality.

Challenge for Today

1. Pull up the last deal you analyzed. Run all five metrics with the assumptions above. Does it still look good?
2. If you've never calculated DSCR on your existing properties, do it now. Any property below 1.15 needs attention.
3. Model the REI Prime Calculator at reiprime.com/calculator with a deal from your target market. See how fast you can screen it.