A Fast Cash Flow Screen for Rental Properties

Most rentals you look at won't work. The trick is finding that out in five minutes, not five hours. A quick screen lets you toss the losers early and spend your real analysis time on the few that might pencil.

Filter one: rent-to-price

Take the monthly rent you expect and divide it by the price. Many investors look for something around 0.7% to 1% or better, though the right bar depends on your market, rates and expenses. This is a rough filter, not a verdict.

A house priced at $250,000 that rents for $2,250 is 0.9%. One at $250,000 renting for $1,400 is 0.56%. The second one probably won't cash flow with a loan on it, so you can move on.

Filter two: a quick expense estimate

At this stage, don't build a full budget. Estimate total operating expenses as a share of rent. A common rule of thumb for single-family and small multifamily is roughly 35% to 50% of the rent collected, higher for older properties or high-tax areas.

That number should cover taxes, insurance, management, repairs, a vacancy allowance, capital reserves, and HOA dues if there are any. If you know the actual tax bill or HOA amount, use it.

Filter three: can the rent carry the loan?

Estimate the monthly loan payment using a reasonable rate and a 30-year amortization. Then compare.

DSCR (debt service coverage ratio) lenders on 1 to 4 unit rentals often divide rent by the full monthly payment, including principal, interest, taxes, insurance and HOA dues. A result of 1.0 means rent exactly covers it. Higher gives you more room and usually better terms.

Example, round numbers only:

• Price: $250,000. Rent: $2,250 a month.
• Loan at 75%: $187,500. Principal and interest at an assumed rate: about $1,300 a month.
• Taxes and insurance: about $400 a month.
• Full payment: about $1,700. DSCR: $2,250 ÷ $1,700 = about 1.3.
• Add management, repairs, vacancy and reserves of about $500, and estimated cash flow is around $50 a month.

The ratio passes, but cash flow is thin. That tells you the price may need to come down, or this is a deal for appreciation and loan paydown, not monthly income. Now you know what to look for in the full analysis.

Filter four: the neighborhood

Numbers on a screen don't rent the unit. Check tenant demand and vacancy, rents for similar homes on nearby streets, schools and access to jobs, and population and employment trends. In a strong area you can accept a little less rent per dollar of price, since vacancies are shorter and tenants stay longer.

What this means for you

If a property clears all four filters, it has earned a full analysis: verified rents, real tax and insurance quotes, an inspection, and a detailed expense budget. If it fails one, let it go. The point of screening is to say no fast so you can say yes with confidence.

RSC's DSCR Rental program accepts a ratio as low as 0.75x. Its published rate table, starting at 6.750%, is based on purchases of leased single-family homes at 1.20x or higher.

Found one that passes the screen? Send RSC Private Lending your scenario for a term sheet in 24 hours. Subject to underwriting.