When you’re looking at a rental deal, the spreadsheet can feel like a quiz with a lot of trick questions. Let’s make it simple: five numbers will tell you, fast, whether a property is likely to be fundable and which inputs lenders will check first. This is a practical “can I qualify?” formula you can run in five minutes.
- Projected Net Operating Income (NOI).
NOI = Annual Rental Income (after vacancy) + Other income − Operating expenses. Lenders use NOI to judge a property’s ability to carry debt. If your NOI is weak or negative, you’ll struggle to find conventional financing.
Quick-Check Formula:
Projected NOI (annual) = (Gross Rental Income − Vacancy) + Other Income − Operating Expenses
• Example: $120,000 − 6% vacancy ($7,200) + $2,400 other − $40,000 expenses = $75,200 NOI.
- Vacancy Rate Assumption.
Underwrite conservatively. Many underwriters use a stabilized vacancy of about 5–8% (value-add deals may start higher but should justify it). If your projected occupancy depends on optimistic leasing timelines, plan for a buffer.
Quick-Check Formula:
Vacancy Assumption = use 5–8% for stabilized residential underwriting; higher only with clear plan.
- Debt Service Coverage Ratio (DSCR).
DSCR = NOI ÷ Annual Debt Service. Lenders commonly look for a DSCR around 1.0–1.25 or higher; 1.25 is a clean rule-of-thumb for steady approval and better rates. A DSCR below 1.0 is risky without compensating factors.
Quick-Check Formula:
DSCR = NOI ÷ Annual Debt Service
• Rule: DSCR ≥ 1.25 preferred. If DSCR < 1.0, identify gap.
- Down Payment / Loan-To-Value (LTV).
Most conventional and investor-focused programs expect meaningful equity — often in the 20–30% down range. Higher down payments improve lender comfort and pricing; lower down options usually come with higher rates or tighter terms.
Quick-Check Formula:
Target: ≥20% down (25–30% for some investor programs). More equity = better terms.
- Rents vs. Market (rent realism).
Compare in-place rents to local market rents and recent comps. If your pro forma rents are materially above market without a clear plan, lenders will discount them. Use conservative rent estimates when you calculate cash flow and DSCR.
Quick-Check Formula:
• Compare current rents to 3 recent comps; if your pro forma > market, reduce by conservative margin.
Quick decision rule: if NOI is positive, vacancy assumed ≤8%, DSCR ≥1.25, down payment ≥20%, and rents are at-or-below market comps, the deal is likely fundable by conventional or DSCR-focused lenders. If one or more items miss, the next step is to quantify the gap and pick a funding path from conventional mortgage to specialized DSCR or bridge solutions.
Want a two-minute numbers review? Book a consultation and we’ll run your numbers together and map the best funding route.
