How to Underwrite a Rental Property: The Numbers That Actually Matter

Most investors run cash flow and stop. That's not underwriting — that's wishful thinking with a spreadsheet.

Real underwriting means building a case for why a deal works and identifying exactly where it breaks. You're not trying to confirm a number you already want. You're trying to find the number that's actually there.

What "Underwriting" Actually Means

The term comes from insurance and banking — the underwriter takes on risk after reviewing all the numbers. That's the right frame for real estate too. You're not selling yourself on a property. You're deciding whether the risk justifies the price.

For a rental, that means answering three questions before you make any offer:

1. Does it cash flow at my actual financing terms?
2. Does the purchase price make sense relative to what the market produces in rent?
3. What happens to the deal if things go sideways?

Most investors answer question one. Fewer run question two. Almost none build a downside scenario for question three. That last gap is where deals blow up six months after closing.

The Five Numbers Every Rental Underwrite Requires

Run all five. Skip one and you'll either miss a good deal or, worse, buy a bad one.

Net Operating Income (NOI)

NOI is gross rental income minus operating expenses, before debt service. It's the cleanest measure of what a property actually produces.

NOI = Gross Rents − Vacancy − Operating Expenses

A worked example: a Tampa duplex renting for $2,400/month total.

• Gross annual rents: $28,800
• Vacancy (8%): −$2,304
• Operating expenses — taxes, insurance, maintenance, reserves, property management (40% of effective gross): −$10,598
• NOI: $15,898

Cap Rate

Cap rate answers: what would this property be worth to an all-cash buyer? It strips out your specific financing terms and gives you a number you can compare to market transactions.

Cap Rate = NOI ÷ Purchase Price

Same duplex at $189,000: $15,898 ÷ $189,000 = 8.4%

Tampa Class B residential cap rates are running 6–8% right now. At 8.4%, you're buying on the right side of the market. If the cap rate comes out at 5%, you're counting on appreciation to make the deal work — and appreciation is speculation, not underwriting.

Cash-on-Cash Return (CoC)

CoC is what you actually earn on the dollars you put in. Unlike cap rate, it accounts for your specific financing.

CoC = Annual Cash Flow ÷ Total Cash Invested

Same duplex with 25% down on a conventional loan at 7.25% ($141,750 financed):

• Monthly P&I: $967
• Annual debt service: $11,604
• Annual cash flow: $15,898 − $11,604 = $4,294
• Cash invested: $47,250 down + $3,400 closing costs = $50,650
• CoC: 8.5%

At today's rates, 8%+ CoC on a residential rental is solid. Above 10% and you're looking at a deal worth moving fast on.

Gross Rent Multiplier (GRM)

GRM is the fastest sanity check in the toolkit. It tells you how many years of gross rent equal the purchase price — nothing more, nothing less.

GRM = Purchase Price ÷ Annual Gross Rents

Tampa duplex: $189,000 ÷ $28,800 = 6.6

For residential rentals in the Southeast, target a GRM under 8. Above 10 is a red flag — either the price is too high or the rents are below market. Worth investigating before going further.

Debt Service Coverage Ratio (DSCR)

DSCR measures whether the property's income covers the mortgage payment. It's the number your lender is running whether you are or not.

DSCR = NOI ÷ Annual Debt Service

Tampa duplex: $15,898 ÷ $11,604 = 1.37

Most DSCR lenders want at least 1.25. At 1.37, this deal qualifies comfortably. Below 1.0 means the rent doesn't cover the mortgage — which is a non-starter for any institutional lender and should be a warning flag for you too.

DSCR is one of five metrics; for the foundational model they all fit into, start with Real Estate Underwriting 101.

The Assumptions That Kill Deals

The numbers are only as good as what you put into them. These four inputs are where underwriters cut corners.

Vacancy rate. Using 5% because "the market is hot" is how you get surprised when a tenant leaves in January. Run 8–10% unless you have specific data — actual submarket vacancy rates, not the seller's pro forma. For multifamily, use unit-level vacancy, not a blended portfolio average.

Capital expenditures. Capex is the budget category investors most commonly skip. Roof, HVAC, water heater, appliances — they all fail eventually. A workable rule: budget $100–$150 per unit per month for capex reserves. On a duplex that's $200–$300/month, or $2,400–$3,600/year. Not budgeting for it doesn't make the expense go away; it just means you're unprepared when it arrives.

Property management. Even if you self-manage today, underwrite with professional management at 8–10% of gross rents. If the deal doesn't work with that cost baked in, it doesn't really work — you're subsidizing it with your own labor. The day you want to stop managing it, you'll either have to eat the cost or sell.

Rent projections. Use current market rents, confirmed against active comps. If you need rent growth or appreciation over the next 18 months to make the numbers work, write that assumption down explicitly and ask yourself whether you're willing to bet on it. That's a separate decision from whether the deal underwrites.

Why Your Lender's DSCR Differs From Yours

First-time DSCR loan borrowers often find out at the appraisal stage that the lender's number doesn't match theirs. Common reasons:

• Lenders use gross scheduled rent from the appraisal, not your lease or pro forma
• They apply a standard vacancy factor (often 5–7%) regardless of your market research
• Taxes and insurance are underwritten at the lender's escrow estimate, which can run higher than your research
• Many lenders require 6–12 months of PITIA reserves in the bank after closing, which affects how much cash you need at closing

The gap between your model and the lender's model can be 0.1–0.2 on DSCR. If your model shows 1.30 and the lender computes 1.18, you don't qualify for the standard DSCR product — and you might find out two weeks before your closing date.

Run the lender's version of the math before you put the deal under contract. Use the financing assumptions your lender has actually quoted, not a generic rate.

Running a Stress Test

Base case numbers tell you what happens if everything goes to plan. Stress tests tell you whether you can survive if they don't.

For a rental property, adjust three inputs simultaneously:

• Vacancy: +5% above your base assumption
• Rents: −10% (one bad turnover or a softer quarter)
• If you're using variable or bridge financing: +1–1.5% on your rate

Run all five metrics again under those conditions. If the deal falls to negative cash flow, DSCR drops below 1.0, or CoC craters to under 3%, you're running too thin. Either the price needs to come down or you need a larger equity position at purchase.

Deals that survive the stress test at a smaller but still-acceptable return are deals worth buying. Deals that only pencil in the base case are counting on everything going right — which is not a plan.

BRRRR Changes the Math, Not the Discipline

If your exit is a BRRRR — buy, rehab, rent, refinance, repeat — you're running two separate underwrites, not one.

The first is an acquisition and rehab underwrite: what does it cost to get to stabilized value, and what's the after-repair value (ARV)? The second is the stabilized rental underwrite: what does the property produce as a rental, post-rehab, under the terms of the cash-out refinance?

The BRRRR deal is only good if the refinance returns enough equity to justify the value-add cost while the stabilized rental still cash flows after the new loan balance. A common mistake: investors focus entirely on the rehab-to-ARV spread and never run the stabilized CoC and DSCR. You can force enough equity to get a full cash-out refinance and still own a property that barely covers expenses at the new loan amount.

BRRRR isn't the only way to bend the financing side of a deal — taking over a seller's existing low-rate loan does it differently. See the subject-to financing breakdown for how that math runs.

Running a Live Deal in Under 30 Minutes

When you have a real deal in front of you, here's the order of operations:

1. Confirm market rents — pull Zillow, Rentometer, and one local PM's current listings for comparable units. Don't use the seller's pro forma.
2. Itemize operating expenses — taxes (pull the actual county tax bill, not an estimate), insurance quote, property management at 8–10%, maintenance at $75–$100/unit/month, capex reserves.
3. Calculate NOI — gross rent minus vacancy minus all operating expenses.
4. Run all five metrics — NOI, cap rate, CoC, GRM, DSCR.
5. Run the stress test — drop rents 10%, raise vacancy 5 points, confirm the deal doesn't collapse.
6. Compare to market — does your cap rate make sense given what comparable properties are selling for? If you're at a 5% cap in a 7.5% cap market, you need a specific thesis.

The full analysis takes 20–30 minutes with a purpose-built tool. The underwriting calculator at dre1mery.com runs all five metrics in real time as you enter inputs, so you see the full picture without rebuilding formulas.

Once the numbers hold up, share the analysis with a partner or lender before committing. You can post the deal for a second opinion directly from the platform if you want another investor's read before going under contract.

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Cap rate and cash flow are the starting point, not the finish line. The deals that look great on a quick back-of-napkin analysis are the same ones that blow up when reality shows up. The deals that survive a full underwrite — real vacancy, full expense load, lender DSCR, downside scenario — are the ones worth buying.

Build the whole model. Know what breaks the deal first. Then decide.