Quick Answer — How Do You Analyse a Duplex or Fourplex?
Build the income statement first, then apply the debt. The order matters, because every metric that follows comes from a different line of it.
- Gross Potential Rent = Rented Units × Monthly Rent × 12
- Effective Gross Income = Gross Potential Rent − Vacancy + Other Income
- Net Operating Income = Effective Gross Income − Operating Expenses *(mortgage excluded)*
- Annual Cash Flow = Net Operating Income − Annual Debt Service
Worked example: a $425,000 duplex renting at $1,750 a unit with $75 a month of other income, 6% vacancy and a 35% expense load. Gross potential rent is $42,000, effective gross income is $40,380, operating expenses are $14,133, and net operating income is $26,247.
At 25% down ($106,250) the $318,750 loan at 6.75% over 30 years costs $2,067.41 a month, or $24,808.88 a year. Annual cash flow is $1,438.12 — $119.84 a month. With $11,000 of closing costs and $6,000 of rehab, total cash invested is $123,250, giving a cash-on-cash return of 1.17%, a cap rate of 6.18%, and a DSCR of 1.06.
That is a thin deal, and the metrics say so in three different ways at once. A 6.18% cap rate is respectable; a 1.06 DSCR is barely above breaking even on the debt; and a 0.82% rent-to-price ratio fails the 1% screen. The property is fine and the financing is tight — a distinction cap rate alone would never show.