Gross potential rent
What the property would collect if every unit were leased at its rent.
Underwriting 101
Every good deal starts with honest math.
A plain-English guide to underwriting a rental property: the key numbers, what they mean and the assumptions that make or break a deal.
What underwriting really is
Underwriting is the process of estimating what a property will earn, what it will cost to operate and finance, and what it is therefore worth to you.
It is not about making the numbers work. It is about finding out whether they do.
The numbers that matter
Vacancy & credit loss
An honest allowance for empty units and unpaid rent.
Operating expenses
Taxes, insurance, utilities, repairs, payroll, management and reserves.
Net operating income (NOI)
Income after operating expenses, before debt service.
Cap rate
NOI divided by price: a quick way to compare value across similar properties.
Debt service coverage (DSCR)
NOI divided by annual loan payments. Lenders use it to size loans.
Start with the rent roll
Verify every unit: current rent, lease dates, deposits and any concessions. Compare in-place rents to the market to see what is realistic, and how long it would take to get there.
Rebuild the expenses yourself
Seller statements are a starting point, not an answer. Re-estimate taxes after the sale, get insurance quotes, check utility bills and budget real money for repairs and reserves.
Stress-test the deal
Ask what happens if vacancy rises, rents grow slower or interest rates are higher at refinance. A good deal still works under conservative assumptions.
Frequently asked questions
What is a good cap rate for a rental property?
There is no single good cap rate. It depends on location, property type, condition, interest rates and risk. Compare against recent sales of similar properties in the same market.
How do you calculate net operating income?
Take total rental and other income, subtract an allowance for vacancy and credit loss, then subtract operating expenses. Debt payments are not included in NOI.
What is cash-on-cash return?
Annual pre-tax cash flow after debt service, divided by the total cash you invested. It measures the yield on your own money.
What is DSCR and why do lenders care?
Debt service coverage ratio is NOI divided by annual debt payments. Lenders use it to make sure a property earns enough to pay its loan with a cushion.
Have a deal to talk through?
Owners and brokers are welcome to reach out about opportunities.
Brooklyn, New York