Which five metrics actually decide whether you buy a rental?

Question

A rental can show a healthy DSCR and still deliver a disappointing return on the cash invested. It can also have an attractive cash-on-cash return while leaving very little room for unexpected expenses.

For a financed buy-and-hold deal, these are the five metrics I’d put side by side:

• Debt service coverage ratio (DSCR): How comfortably does the property’s income cover its debt payments? The calculation matters—check which income and expenses are included.
• Loan-to-value ratio (LTV): How much debt are you taking on relative to the property’s value, and how much equity cushion remains?
• Cash-on-cash return: What annual cash flow do you expect relative to the total cash invested, including closing costs and initial repairs?
• Cap rate: What does the property’s net operating income represent as a percentage of its purchase price, before financing?
• Break-even occupancy: How much occupancy does the property need to cover operating expenses and debt service?

Debt service coverage ratio (DSCR): How comfortably does the property’s income cover its debt payments? The calculation matters—check which income and expenses are included.

Loan-to-value ratio (LTV): How much debt are you taking on relative to the property’s value, and how much equity cushion remains?

Cash-on-cash return: What annual cash flow do you expect relative to the total cash invested, including closing costs and initial repairs?

Cap rate: What does the property’s net operating income represent as a percentage of its purchase price, before financing?

Break-even occupancy: How much occupancy does the property need to cover operating expenses and debt service?

The interesting part is where they disagree. Putting more money down can improve DSCR and monthly cash flow while reducing the return on your cash. A higher cap rate may come with greater maintenance demands or less predictable income.

And none of these numbers means much if the rent, expense, and repair assumptions behind them are weak.

Which metric is your first filter, and which one has actually made you walk away from an otherwise attractive deal? Would you replace any of these five?

Levi Rawlings · Answer

Sheldon, when I'm looking at another property for the portfolio — I own a couple of duplexes and house-hack a triplex — the metric that has made me walk is break-even occupancy. If the building needs near-full occupancy just to cover expenses and debt, there's no room for a slow lease-up or a repair month.

DSCR and cash-on-cash can look fine on paper and still disagree with that. Putting more money down improves the coverage ratios and can cut the return on cash at the same time, so I look at them together rather than picking a favorite.

Cap rate only helps if the income and expenses behind it are ones I can verify. Weak assumptions make all five of these numbers look better than the property actually is.

Has break-even occupancy ever been the one that stopped a deal for you, or do you usually filter somewhere else first?

Ametria Chaney · Answer

Sheldon, this is a great framework, and I agree the five are strongest together. From the Realtor side, my first filter is really the one underneath all five: can I verify the rent and the expenses? If the rent is a guess and the expenses leave out vacancy, repairs, and taxes and insurance as they are today, every metric after that is just decoration.

After that, break-even occupancy is the one that has made me pause most often, because it tells the truth about how little room a deal has when a tenant leaves or a repair lands. A deal can look fine at full occupancy and still be fragile. I like Addy's point about running cash-on-cash twice — once before reserves and once after — because that's the number a buyer actually lives with.

Jeremy White · Answer

The tax line is one assumption that quietly breaks all five of these numbers, because many counties reassess after a sale and the bill the seller was paying is not the bill you will get. Running the metrics with a property tax figure based on your purchase price rather than the seller's current bill keeps DSCR, cap rate and cash on cash honest. A deal that still clears the bar on the higher tax number has a much better chance of holding up in year two.

Eric Gerakos · Answer

My first filter is tenant pool. None of the other metrics matter if the locals can't or won't pay the rent.

Dan Worth · Answer

My first filter isn't one of the five ratios, it's whether the rent, vacancy, and repair assumptions are ones I can defend with local comps and a walk of the property. After that, break-even occupancy is usually the deal killer for me: if the building needs near-full occupancy just to cover debt and ops, a slow lease-up or one big repair month breaks it. DSCR and cash-on-cash can both look fine while that risk is still hiding. Cap rate only earns a seat once the income and expenses behind it are verified.

Randy Schell · Answer

One thing I would add is the actual insurance quote and utility history. Those can move the cash flow more than another line in the summary.

Randy, Bunklow

John Cafarelli · Answer

Sheldon, my first filter is break-even occupancy, because it tells me how much slack I actually have before a vacancy or a repair turns a decent month into a stressful one. I learned this the hard way on my first small rental: the cash-on-cash return looked fine on paper, but one turnover and a water heater in the same quarter wiped out most of the year's cushion. Now I run the numbers with real rent, not hoped-for rent, and I subtract a monthly amount for repairs, vacancy, and larger replacements based on the age of the roof, HVAC, and appliances. I also reconcile rent and expenses every month, property by property, so I can see whether the actual cash flow matches what I underwrote. If a deal only works when everything goes perfectly, I pass. The metric that has made me walk away most often is cash-on-cash after those realistic reserves, not the headline number from the listing.

Addy Chupa · Answer

Sheldon, of those five, the one that has actually made me walk is cash-on-cash after I fund a real CapEx reserve — not the pretty CoC from the listing.

I take the first-year cash flow, subtract what I need to set aside for roof, HVAC, and turn costs based on the age of the systems (not a flat percentage), and only then divide by total cash in. Plenty of deals still show a healthy DSCR and an 8–10% CoC before that reserve, then drop to 3–4% once the money is truly spoken for.

Break-even occupancy (like Levi said) and that stress-tested CoC usually disagree with the listing’s CapEx assumption, and that’s when I pass. I wouldn’t replace any of your five — I’d just run CoC twice: once as presented, once after funding reserves.

Which five metrics actually decide whether you buy a rental?

Which five metrics actually decide whether you buy a rental?

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