RentCheck

How to read these numbers

Short, practical answers to the questions that actually decide whether a rental deal works.

What DSCR do lenders require?

DSCR is net operating income divided by annual debt service. Most DSCR-loan programs on 1–4 unit rentals want 1.25; some will go to 1.10–1.20 with a rate bump or more money down, and a few will do “no-ratio” below 1.0 at materially worse pricing. Two things trip people up. First, lenders compute NOI their way — they apply their own vacancy factor and often will not count your optimistic rent, only the appraiser’s market rent (the 1007 form). Second, NOI excludes your mortgage but also excludes capex reserves, so a 1.25 DSCR on paper can still be a property that eats cash the first time a roof goes. If your DSCR is between 1.0 and 1.25, the fix is almost always a bigger down payment rather than a better rate.

What is break-even vacancy, and why does it matter more than cap rate?

Break-even vacancy is the share of the year the unit can sit empty before annual cash flow hits zero. Cap rate tells you what you are paying for the income stream; break-even vacancy tells you how much has to go wrong before you are writing checks. A deal with 18% break-even vacancy survives a bad tenant, a two-month turn and a soft leasing season. A deal with 4% survives nothing — one 15-day vacancy plus a turnover cost puts it underwater. When you are comparing two properties with similar returns, the one with more vacancy headroom is the better business, and it is the number almost nobody runs.

Is the 1% rule still useful?

As a screen, yes; as a decision, no. Monthly rent ÷ price ≥ 1% was a rough proxy for “rent will outrun expenses,” and it was calibrated to an era of ~4% money and cheap insurance. At 7% rates the same 1% property can be cash-flow negative. Use it to decide what to underwrite, not what to buy — and note it says nothing about taxes, which vary 4x between states, or about insurance, which has doubled in coastal and wildfire markets. Under 0.7%, expenses dominate and you are buying an appreciation bet.

What expense ratios should I assume?

On a single-family rental, budget roughly 5% of collected rent for maintenance, 5% for capital reserves (roof, HVAC, water heater — they are not “if,” they are “when”), 8–10% for management even if you self-manage, and 5% vacancy in a normal market. Get taxes from the county, not the listing: many states reassess at your purchase price, so the seller’s tax bill can be half of yours. Get a real insurance quote before you remove contingencies. Those two line items are where optimistic spreadsheets die.

Cash-on-cash or IRR?

Cash-on-cash answers “what does this pay me while I hold it,” and it is what keeps you solvent. IRR answers “what did the whole trade return,” and it includes appreciation and loan paydown that you cannot spend and have not earned yet. A 12% IRR built almost entirely out of an assumed 3%/yr appreciation is a forecast, not a return. Underwrite on cash-on-cash and DSCR; treat IRR as the tiebreaker.