PITI
Principal, Interest, Taxes, and Insurance — the four components of a full mortgage payment. Always underwrite with PITI, not just P&I, or your cash flow will be overstated.
NOI — Net Operating Income
Effective gross income minus operating expenses before debt service. NOI tells you if the property is profitable as a business, independent of how it is financed.
Cash Flow
Money left after all expenses including the mortgage payment. Positive cash flow means the property pays you. Negative cash flow means you pay the property — every month.
DSCR — Debt Service Coverage Ratio
NOI divided by annual debt service. A DSCR above 1.25 is healthy. Below 1.0 means income does not cover the mortgage — the deal loses money before any surprises.
Cap Rate
NOI divided by purchase price. Useful for comparing properties independent of financing. A 7% cap rate means you earn 7% of the purchase price annually from operations.
Cash-on-Cash Return
Annual cash flow divided by total cash invested (down payment plus closing costs plus repairs). Measures the return on your actual out-of-pocket investment.
The 1% Rule
A quick filter: monthly rent should be at least 1% of purchase price. A $200K property should rent for $2,000/mo minimum. It is a screening tool only — not a substitute for full underwriting.
Vacancy Rate
The percentage of time the property sits empty. Budget 5-10% for single family, 5-8% for multifamily in stable markets. Ignoring vacancy is one of the most common rookie mistakes.
Reserves
Cash set aside for repairs, vacancies, and emergencies. Rule of thumb: keep 3-6 months of total expenses in reserves before buying a rental. Without reserves, one bad month can break you.