How I Screen a Rental Property's Real Cash Flow Before Buying or Refinancing

The first rental I almost bought penciled at $214 a month positive. Then the water heater failed, the tenant gave notice, and I repainted two rooms. That $214 didn't exist.

You need a better filter than the one on the listing sheet. I start with a lender-style debt-service coverage ratio. DSCR divides your gross monthly rent by the full monthly payment: principal, interest, property taxes, insurance, and HOA (homeowners association) dues if any. If rent is $1,800 and all that costs $1,500, your DSCR is 1.20. Many investors want 1.2 or better before they'll even look. It's a rough first screen. It tells you the bank might smile. It says nothing about vacancy, a new roof, or the turnover between tenants.

Then I run the owner-level number. I take realistic rent, not the highest listing I can find. I call two local property managers and ask what this unit would actually lease for. I get an actual insurance quote. Then I deduct percentages the lender's formula ignores.

For vacancy, I use 10% of monthly rent. That's one month empty every ten months. If your market turns over every two years, that number is low. Repairs and maintenance get another 8-10% depending on the age of the mechanicals. Capital expenditures—capex—are the big-ticket items: roof, furnace, siding, water heater. Those don't hit monthly, but they hit. I set aside $100 to $200 a month per unit for capex, more for older stock. Turnover costs—cleaning, paint, a lock change, maybe a week of lost rent—average a few hundred dollars every time a tenant leaves. And management: even if you self-manage, pay yourself 8% to 10% of collected rent. Your time has a cost. If you won't run it this way, buy a REIT.

Let me show the arithmetic on a modest single-family. Rent: $1,600. Payment with tax, insurance, HOA: $1,350. DSCR is 1.19. Lender's fine. Now deduct 10% vacancy ($160), 8% repairs ($128), $150 capex, $120 management, and say $75 a month averaged for turnover. That's $633 in non-debt costs. Add them to the $1,350 payment and you need $1,983. The place rents for $1,600. You're $383 underwater every single month before you've bought a light bulb. That's the real number.

When I'm refinancing, I run the same worksheet with the proposed new payment. A cash-out refi that pushes DSCR below 1.25 on the lender's calc probably means I'm trading tomorrow's cash for today's check. I only do that if the cash goes back into the property—new HVAC, roof, a second unit—not into the next deal.

Reserves change the picture too. I won't close without six months of total housing cost in a separate account. Not invested. Not spendable. This is the difference between a slow month and a forced sale. If the water heater goes and the tenant moves out in the same quarter—that happens—you write one check and keep the mortgage current. I learned that from managing other people's properties for years.

Tax benefits stay out of my cash-flow decision. Depreciation and interest deductions are real, but they lower your tax bill in April. They do not pay the plumber in November. If the property only works with the tax refund folded back in, you're buying a second job, not an investment.

Before I sign anything, I confirm a backup plan. I test how long I can carry this from savings if rent drops 15% and vacancy doubles. If the answer is under twelve months, I pass. That sounds hard. It did to me too, until I saw a landlord lose a four-unit to a six-month vacancy and a slab leak in the same year. He had a 1.35 DSCR on paper. The paper didn't own the building.