Deal Analysis

Anatomy of a Real Deal

Theory means nothing without application. This lesson walks through a complete deal analysis on a real-world example: a $250,000 single-family rental. Every number is grounded in actual market conditions. By the end, you will know exactly how money flows into a deal, through the operating period, and back to you as an investor. The goal is not to memorize formulas. The goal is to build a mental model where you hear a purchase price and a rent number and your brain automatically starts running the math. The best investors do this reflexively. They hear "$250K, rents for $1,800" and within seconds they know the GRM (11.6, not great), the rough NOI range, and whether the deal is even worth a second look. That instinct comes from repetition, and it starts with walking through one deal completely.

Sources and Uses: $250,000 SFR Rental

Every deal starts with a sources and uses table. Uses are where the money goes. Sources are where the money comes from. The total must balance. This is the foundation of every real estate pro forma.

• USES:
• Purchase Price: $250,000
• Closing Costs (3%): $7,500
• Renovation Budget: $25,000
• Operating Reserves: $5,000
• Total Uses: $287,500
• SOURCES:
• First Mortgage (75% LTV on $250K): $187,500
• Equity (Down Payment + Costs + Reno + Reserves): $100,000
• Total Sources: $287,500

Debt Service Calculation

The mortgage on this deal: $187,500 at 7.0% interest, 30-year fixed. Monthly principal and interest payment: $1,247. Annual debt service: $14,964. This is the number that separates positive cash flow from negative. Every dollar of NOI above $14,964 is cash in your pocket. Every dollar below means you are feeding the property out of your own funds. At 7% interest on a 30-year amortization, roughly 80% of your early payments go to interest and only 20% to principal. Year one principal paydown on this loan: approximately $2,820. By year 10, the split shifts to roughly 65% interest and 35% principal. By year 20, it flips to majority principal. This is why early payoff or refinancing can dramatically change your return profile.

• Loan Amount: $187,500
• Interest Rate: 7.0% fixed
• Term: 30 years
• Monthly P&I: $1,247
• Annual Debt Service: $14,964
• Year 1 Interest Paid: ~$13,050
• Year 1 Principal Paid: ~$2,820

Amortization Calculator

Enter the loan amount, interest rate, and term to see your monthly payment, total interest paid over the life of the loan, and the amortization schedule showing how principal and interest shift over time. Try running $187,500 at 7% for 30 years and compare it to 15 years. The monthly payment jumps from $1,247 to $1,685, but total interest drops from $261,420 to $115,780.

Annual Cash Flow: The Full Picture

Now we assemble the complete picture. Monthly rent: $1,800. Vacancy allowance: 7% ($1,512/year). Effective Gross Income: $19,488. Operating expenses run roughly 45% of effective gross income on a single-family rental (lower than the 50% rule because SFRs have no common area maintenance or shared utility costs).

• Gross Annual Rent: $21,600 ($1,800 x 12)
• Less Vacancy (7%): -$1,512
• Effective Gross Income: $19,488
• OPERATING EXPENSES:
• Property Taxes: $3,000
• Insurance: $1,800
• Maintenance (1% of value): $2,500
• Property Management (8%): $1,559
• CapEx Reserves (7%): $1,364
• Total Operating Expenses: $10,223
• NOI: $9,265
• Less Annual Debt Service: -$14,964
• Annual Cash Flow (Pre-Tax): -$5,699
• This deal is cash flow NEGATIVE at 7% financing.

Three Paths to Positive Cash Flow

The base case above is negative $5,699 per year. That does not mean the deal is dead. It means the assumptions need to change. Real investors do not walk away from a deal because the first pass does not pencil. They test different structures to find the version that works, or confirm that it genuinely does not.

• Path 1: Lower purchase price. At $200K (same rent, same terms), NOI stays similar but debt service drops to $11,970. Cash flow flips to roughly +$800/year. Cash-on-cash: ~1% on $80K invested. Better, but thin.
• Path 2: Higher rent. At $2,100/month (same price), gross rent jumps to $25,200, EGI to $23,436, NOI to ~$12,200. Cash flow: roughly -$2,700. Still negative, but closer.
• Path 3: Larger down payment. Put 40% down ($100K) on $250K, loan drops to $150K, debt service to $11,970. Cash flow: roughly -$2,700 on larger equity base.
• Path 4 (combination): $220K purchase, $1,900 rent, 25% down. Debt service: $10,975. NOI: ~$10,000. Cash flow: roughly +$1,000/year.
• In a high-rate environment, many SFR deals are negative cash flow but positive total return when you include $2,820 in annual principal paydown, $5,000-10,000 in potential annual appreciation, and $3,000-5,000 in annual tax benefits from depreciation.

Deal analysis is sources and uses, operating income, operating expenses, NOI, debt service, and cash flow. Run every deal through this sequence before making an offer. At current interest rates, many residential deals are cash flow negative on paper. Total return analysis (cash flow + principal paydown + appreciation + tax benefits) often tells a different story, but never ignore negative cash flow hoping appreciation will bail you out. Hope is not a strategy.