Collect the required inputs: gross scheduled income (GSI), vacancy rate assumption, operating expenses (taxes, insurance, maintenance, management fee, utilities), net operating income (NOI), purchase price, and annual debt service.
Calculate NOI: NOI = GSI x (1 - vacancy rate) - total operating expenses; do not include mortgage payments or depreciation in operating expenses.
Calculate cap rate: Cap Rate = NOI / Purchase Price; express as a percentage and compare to market cap rates for the property type and location.
Calculate debt service coverage ratio: DSCR = NOI / Annual Debt Service; lenders typically require DSCR >= 1.25 for investment property loans.
Calculate cash-on-cash return: CoC = (Annual Pre-Tax Cash Flow) / (Total Cash Invested); where pre-tax cash flow = NOI - Annual Debt Service and total cash invested = down payment + closing costs.
Expose all intermediate values in the output so users can audit the calculation; present a sensitivity table varying vacancy rate and rent assumptions.
Known gotchas
Cap rate is a property-level metric and should not include financing costs; mixing in debt service when computing cap rate is a common error that produces misleading comparisons.
Management fee should always be included in operating expenses even for self-managed properties to produce a realistic underwriting; omitting it inflates the apparent return.
Gross scheduled income should reflect market rents, not current below-market rents, when underwriting a value-add acquisition — using current rent understates potential NOI.
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