How to Analyze a Rental Property Deal

Emily found what looked like a deal. A triplex in Memphis, Tennessee. Listed at $295,000. All three units rented. Gross income of $2,900 a month — $1,050, $950, and $900 across the three units. She calculated the numbers on the back of a napkin. Looked great.

Then she ran them properly.

Gross potential rent: $34,800/year. But she deducted 7% vacancy ($2,436) — because tenants leave, and Memphis vacancy runs 6-8% in B-class neighborhoods. Effective gross income: $32,364.

Operating expenses hit harder than expected. Property taxes: $4,500/year. Insurance: $2,100. Property management at 8%: $2,589. Maintenance reserve at 10%: $3,240. Landlord-paid water/sewer: $1,440. Landscaping: $900. Total operating expenses: $14,769.

NOI = $32,364 − $14,769 = $17,595/year. That's $1,466/month.

Not the $2,900/month the listing flyer bragged about. Not even close. Emily's real income — after running the building — was just over half the gross number. That gap is where bad decisions live.

Emily ran every metric on her Memphis triplex at the asking price — $295,000 with a 7.0% rate, 20% down ($59,000), loan amount $236,000.

Cap rate: $17,595 / $295,000 = 5.96%. Acceptable for Memphis B-class. Not exciting.

Monthly cash flow: $1,466 (NOI) − $1,570 (P&I) = −$104/month. Negative cash flow. The property costs her money every month.

Cash-on-cash return: −$1,245/year ÷ $70,000 total cash in (down payment + closing + repairs) = −1.8%. Her money is losing value.

DSCR: $17,595 / $18,840 = 0.93. Below 1.0. A DSCR lender wouldn't touch this.

1% Rule: $2,900 / $295,000 = 0.98%. Just under. Yellow flag.

Then she ran the same property at a negotiated price of $265,000 with a 6.25% rate. Everything shifted.

Cap rate jumped to 6.64%. Monthly cash flow flipped to +$161. Cash-on-cash went from −1.8% to +3.1%. DSCR improved to 1.12. The 1% rule cleared at 1.09%.

Same building. Same tenants. Same NOI. A $30,000 price reduction and 75 basis points on the rate turned a bad deal into a workable one. That's the power of running the numbers at multiple scenarios — you find the price where the math flips.

Emily put her Memphis triplex on a single-page scorecard at both price points.

At $295K / 7.0%: NOI $17,595. Cap rate 5.96%. Cash flow −$104/month. CoC return −1.8%. DSCR 0.93. 1% rule 0.98%. GRM 8.5. Break-even occupancy 96.6%.

At $265K / 6.25%: NOI $17,595 (same). Cap rate 6.64%. Cash flow +$161/month. CoC return 3.1%. DSCR 1.12. 1% rule 1.09%. GRM 7.6. Break-even occupancy 87.2%.

The scorecard made the decision visual. At asking price, five out of eight metrics were in the danger zone. At $265K, only two were marginal (DSCR still below 1.25, GRM slightly high). The break-even occupancy told the real story: at $295K, Emily needed 96.6% occupancy just to stay afloat — one empty unit for one month and she's underwater. At $265K, break-even dropped to 87.2% — she could absorb a vacancy without bleeding cash.

Emily offered $265,000. The seller countered at $278,000. She ran the scorecard at $278K. Cash flow: $34/month. DSCR: 1.02. Break-even: 92.1%. Three metrics still in yellow. She walked.

Two weeks later, she found a duplex in the same neighborhood. Listed at $195,000. Gross rent $2,200/month. She ran the scorecard: every metric cleared. She made an offer that day.

Emily found the duplex that passed her scorecard. Before writing the earnest money check, she ran due diligence.

First, income verification. The seller claimed both units rented at $1,100/month. Emily asked for 12 months of rent rolls. The actual numbers: Unit A paid $1,100 consistently. Unit B paid $1,100 for 8 months, was vacant for 2 months during a turnover, and the new tenant started at $950 after a concession to fill the unit fast. Real average monthly income: $1,975, not $2,200.

That single discovery dropped her NOI by $2,700/year. Her cap rate fell from 7.8% to 6.4%. Cash-on-cash went from 8.2% to 5.1%. Still workable — but very different from the listing's version of reality.

Next, the inspection. The inspector flagged a 22-year-old roof (3-5 years of remaining life, $8,500 replacement), galvanized supply lines in the basement (functional but corroding — $3,200 to replace), and a 15-year-old HVAC in Unit B (running but inefficient). None of these killed the deal. But Emily budgeted $15,000 in near-term capital expenditures — money she'd need within 3 years.

She renegotiated. Original offer: $195,000. Adjusted offer: $182,000 — reflecting the income gap and deferred maintenance. The seller accepted at $186,000. At that price, Emily's scorecard showed a 7.1% cap rate, $187/month cash flow, 5.8% cash-on-cash, and a 1.23 DSCR. Every metric in the green zone.

The deal worked because Emily verified the numbers before committing. The seller's version of the deal and the real version were $9,000 apart — and that gap would have eaten her returns for the life of the investment.