By Mike Tamulevich | Marketplace Homes
Most people who are curious about rental investing eventually hit the same wall. They like the idea. They understand the concept. But when it comes time to actually evaluate a property, they are not sure what they are looking at. What makes a deal good? What makes it pass? What makes it something you should walk away from?
Here is something worth understanding before we get into the math: the quality of underwriting is directly connected to accountability. An advisor who hands you off after the purchase has no reason to be conservative with their projections. A partner who is going to manage the property, handle the leasing, oversee the maintenance, and eventually help you sell it has every reason to get the numbers right the first time. At Marketplace Homes, we are with you from acquisition through disposition. That means our underwriting has to be honest, because we are the ones who have to deliver on it.
With that context, here is how to run the numbers on a new construction rental investment and know what you are looking at when you do.
Start With the Rent-to-Value Ratio
Before you run any other calculation, the rent-to-value ratio tells you quickly whether a market and a property are worth a deeper look. The formula is simple: divide the monthly rent by the purchase price of the home.
Most experienced investors look for a rent-to-value ratio of at least 0.7% to 0.8% as a starting point. That means a $300,000 home should generate at least $2,100 to $2,400 per month in gross rent to clear the initial filter.
A $320,000 new construction home in Oklahoma City generating $2,300 per month in rent comes in at 0.72%. That is worth underwriting further. The same $320,000 home in a coastal market generating $1,800 per month comes in at 0.56%. That market is likely going to be difficult to cash flow, and no amount of optimization downstream will fix a weak rent-to-value ratio at the top.
This ratio does not tell you everything, but it tells you enough to know whether to keep going.
Gross Rent vs. Net Operating Income
Gross rent is what the resident pays. Net Operating Income, or NOI, is what is left after you account for the costs of operating the property. The gap between the two is where a lot of investors get surprised.
For a typical new construction single-family rental, here is what expenses look like on that $320,000 Oklahoma City example generating $2,300 per month in gross rent:
Property management fee (8-10% of gross rent): $207
Property taxes (varies by market, estimated): $300
Insurance: $120
Maintenance reserve (new construction, est. 5% of rent): $115
Vacancy reserve (est. 5% of rent): $115
Total monthly expenses: approximately $857
That leaves a monthly NOI of roughly $1,443, or about $17,316 annually.
Because we manage the properties we help acquire, these expense estimates are not guesses. They are drawn from real performance data across thousands of homes in the markets where we operate. When we tell you what a property will cost to run, we know because we are the ones running it.
Cap Rate: What It Means and What It Does Not
The capitalization rate, or cap rate, is your annual NOI divided by the current market value of the property. It measures the return on the asset independent of how you financed it, and it changes over time as the property appreciates.
Here is the honest truth about cap rate for individual investors: it is not the number you should be optimizing for while you own the property. Cap rate is primarily useful as an exit metric. When you eventually sell to another investor, whether that is a private buyer or an institution, they will use cap rate to value what you have built. A property generating strong NOI in a market with compressed cap rates is worth more at sale. That is where cap rate pays off for you.
During the hold period, cash-on-cash return is the metric that actually tells you how your investment is performing. Cap rates vary significantly by market, with high-demand coastal markets compressing to 3% or lower, while Midwest and Southeast markets tend to run 5% to 7%. That context matters most when you are thinking about where your asset will be valued at disposition, not how it performs day to day.
Cap rate is worth understanding. It is just not the number that should drive your decisions as a buy-and-hold investor.
Cash-on-Cash Return: The Number That Actually Matters for Leveraged Investors
Most rental investors do not pay cash. They finance. And once you introduce a mortgage, the relevant metric shifts from cap rate to cash-on-cash return, which measures the annual cash flow you generate relative to the actual cash you invested.
Back to the Oklahoma City example. On a $320,000 purchase with 20% down, you are putting $64,000 into the deal. At a 7% interest rate on a 30-year loan, your monthly mortgage payment on the $256,000 loan is approximately $1,703.
Monthly NOI: $1,443
Monthly mortgage payment: $1,703
Monthly cash flow: -$260
At those numbers, this property does not cash flow at a 7% rate with 20% down. That is an honest answer, and it is the kind of answer good underwriting is supposed to give you. A partner who is going to manage your property for the next ten years does not benefit from inflating that number to make the deal look better than it is.
But here is where it gets more interesting. If the builder is offering a rate buydown to 5.5%, the mortgage payment on that same loan drops to approximately $1,454. Monthly cash flow becomes positive at roughly $11 per month. Not exciting on its own, but the picture changes when you factor in principal paydown, tax benefits, and rent growth over time. And if you negotiate $10,000 in closing cost credits from the builder, your cash invested drops to $54,000, improving your effective return on invested capital.
This is why builder incentives matter and why understanding the full capital stack, not just the sticker price, is essential to evaluating a new construction deal.
The Metrics That Round Out the Picture
Beyond cap rate and cash-on-cash return, a few other numbers are worth tracking.
Gross Rent Multiplier (GRM). Divide the purchase price by the annual gross rent. A $320,000 home generating $27,600 annually has a GRM of 11.6. Lower is generally better; it means you are paying less per dollar of rental income. GRM is a quick comparison tool, not a final answer.
Debt Service Coverage Ratio (DSCR). Divide your annual NOI by your annual mortgage payments. A DSCR above 1.0 means your property generates enough income to cover its debt. Lenders often look for a minimum DSCR of 1.2 on investment properties. In our example at a 7% rate, the DSCR is approximately 0.85, which is below threshold. At the bought-down 5.5% rate, DSCR improves to approximately 1.0. Some lenders will work with this; others require more cushion.
Rent growth assumption. A property that barely cash flows at today’s rents may be a strong performer in three years if rents grow at 3% to 5% annually, which is consistent with what strong markets have delivered over time. New construction in growing markets tends to see above-average rent growth because the product is newer and the resident base is more stable. Because we handle leasing across our portfolio, we see rent trends in real time and can tell you with confidence what direction a specific market is moving.
What Good Numbers Actually Look Like
A new construction rental investment that pencils well typically has:
– A rent-to-value ratio at or above 0.75%
– A cap rate between 5% and 7% at current market value
– A cash-on-cash return of 5% or better once financing is factored in, after accounting for builder incentives
– A DSCR at or above 1.0
– A market with documented rent growth over the past three to five years
Not every deal will hit every benchmark. The goal of underwriting is to understand exactly which metrics are strong, which are weak, and whether the overall profile makes sense for your investment objectives. A property with strong rent growth and a slightly compressed cash-on-cash return today might be the right hold for an investor focused on long-term appreciation. A property with strong current cash flow in a stable market might be perfect for someone prioritizing income now.
One Partner. Every Step of the Way.
Most real estate transactions involve a handoff. The agent who helps you buy passes you to a property manager. The property manager passes maintenance to a vendor network. When it comes time to sell, you start over looking for the right broker. At every transition, accountability gets diffused and performance expectations reset.
Marketplace Homes is built differently. We work with investors from acquisition through disposition, finding the right property, managing it through its hold period, handling leasing and maintenance, and advising on the eventual sale. We do not pass the buck to the next specialist. We stay in the deal.
That structure changes how we underwrite. When we tell you a property will generate a certain return, we know we are the ones responsible for producing it. That keeps our projections honest, our expense estimates grounded in real data, and our market recommendations focused on what performs rather than what sounds compelling in a pitch.
The underwriting is easy when you must live with the results. We do. And that makes all the difference.
If you are ready to look at the numbers on a specific market or property, reach out. We are happy to walk through it together.
Marketplace Homes is a real estate brokerage and property management company specializing in new construction investment properties.
Transactions are the result; relationships are the reason.