Real Estate Underwriting 101: How to Analyze a Deal in 15 Minutes
Underwriting is the act of asking the same question repeatedly: at this price, with these rents, under this financing, does the deal still make money if I'm half wrong? Everything else is detail.
The five inputs that decide the deal
You can underwrite any residential or small commercial property with five numbers:
- Purchase price — what you'll actually pay, not list.
- Rehab — total scope, contingency included.
- Stabilized rent — what the unit rents for after work, comped against three nearby actuals.
- Operating expenses — taxes, insurance, management, maintenance, capex reserve, vacancy. The 50% rule is a starting point, not an answer.
- Financing terms — rate, amortization, points, prepay penalty.
Get those five numbers, and the rest of the spreadsheet is arithmetic. Get any of them wrong by 10% and your projected cash flow can disappear.
The math, in order
Net Operating Income (NOI) is gross rent minus operating expenses. Cap rate is NOI divided by purchase price. Cash-on-cash is annual cash flow divided by cash invested. None of these are useful in isolation — they're useful as a triangulation. For the rental-specific version of these metrics — GRM, the gap between your DSCR and the lender's, and a full worked example — see how to underwrite a rental property.
For a small residential deal, the order I run the numbers in:
- Gross potential rent → effective gross income (5–8% vacancy haircut).
- Effective gross income → NOI (subtract real operating expenses, not a heuristic).
- NOI → debt service coverage (NOI ÷ annual debt service). Below 1.20× is a warning, below 1.10× is a no.
- NOI minus debt service → annual cash flow. Divide by cash in the deal for cash-on-cash.
- Stress test: rents down 10%, expenses up 10%, vacancy doubled. Is it still positive?
Creative financing changes the math
Subject-To and Seller Finance deals don't fit a conventional underwriting template — you're inheriting a rate and a balance, not generating one. Run two parallel underwrites: one with the existing terms, one with what a refinance looks like in three to five years. If the refinance scenario doesn't pencil, the deal depends on rates moving in your favor, which is not a strategy. For a full worked subject-to example — including the payment-to-rent filter and the due-on-sale math — see the subject-to financing calculator breakdown.
Red flags that kill returns
- Optimistic rents. If the comps come from Zillow Rent Estimate alone, you don't have comps.
- Missing capex reserve. Roofs, HVAC, water heaters, parking lots — they all fail eventually. Reserve $200–$300/door/month at minimum.
- Tax reassessment ignored. A property that traded for half your purchase price is about to get reassessed. Underwrite with the new tax bill.
- Insurance not re-quoted. The seller's policy is irrelevant. Get a real quote before close.
- Management priced at zero. Even if you self-manage, charge 8–10% in the model. You're paying yourself for time that has an opportunity cost.
The 15-minute test
For most deals, a quick triage takes 15 minutes: pull rent comps (three actuals, not three listings), run the five inputs, check DSCR and cash-on-cash, stress-test 10% in each direction. If it survives that, it's worth a full underwrite. If it doesn't, move on — the next deal will be here in a week. When a deal clears triage and you want another investor's read before you commit, post it on /share-a-deal.
On dre1mery.com, the underwriting workflow keeps these five inputs and the stress tests in one view per property type. Single Family, Multi Family, Hotel, Land, Office, and Retail each have their own model — a multifamily deal isn't underwritten the same way as a SFR rental, and the platform reflects that.