A rental is a small business with one product. I underwrite Valley homes and small multifamily properties like one: start with cash flow, stress the assumptions, and know exactly what has to go right.
The three metrics I start with
| Metric | Formula | What it tells you |
|---|---|---|
| Cap rate | Net operating income ÷ purchase price | Unlevered yield. Compares properties regardless of financing. |
| Cash-on-cash return | Annual pre-tax cash flow ÷ total cash invested | What your cash earns in year one, after the mortgage. |
| Debt service coverage ratio (DSCR) | Net operating income ÷ annual debt service | Whether income covers the loan payment. Lenders use it to size and price loans. |
Net operating income (NOI) is rent and other income minus operating expenses, before any mortgage payment. Illustration only, not a market estimate: $10,000 of NOI a year on a $100,000 price is a 10 percent cap rate.
A DSCR of 1.0 means income exactly covers the loan payment. DSCR loans qualify you on the property's income, not your personal income; each lender sets a minimum ratio, and pricing generally improves as it rises.
Build an honest expense budget
Property taxes
With no state income tax, Texas local governments lean on property taxes, and your bill stacks county, city, school and special district rates. Two traps:
- The seller's bill may reflect a homestead exemption that ends once you own the home as a rental.
- The appraisal district may revalue the property after a sale. Underwrite the full rate on a realistic value, and protest each spring when the evidence supports it.
Insurance
A rental needs a landlord (dwelling) policy, not a homeowner's policy. Ask about wind and hail deductibles, often a percentage of dwelling coverage rather than a flat amount. On South Padre Island and elsewhere in coastal Cameron County, windstorm coverage often comes through the Texas Windstorm Insurance Association (TWIA). Flood insurance is a separate policy.
Vacancy, repairs and reserves
Budget for empty months and turnover: paint, cleaning, small repairs and leasing costs. Reserve monthly for big-ticket items (roof, HVAC, water heater, plumbing, foundation), separate from routine repairs. Valley air conditioning works hard, so learn every system's age.
Management and district charges
Even if you self-manage, price in professional management. It shows whether the deal works as an investment or only as a job. Managers usually charge a share of collected rent plus leasing and renewal fees; get written quotes. HOA dues, municipal utility district taxes, and public improvement and irrigation district assessments also cut NOI and are easy to miss in a listing.
Due diligence specific to the RGV
- Flood risk. Check FEMA maps and get flood insurance quotes. Texas landlords must give tenants a written flood disclosure, so learn the floodplain status and flood history.
- Local rental rules. Cities set rules on registration, inspections, occupancy and short-term rentals, and South Padre Island and others collect hotel occupancy taxes. Confirm them for the address before counting on nightly income.
- Demand drivers. Note what sits nearby: UTRGV campuses in Edinburg and Brownsville, medical centers, retail corridors, international bridges and industrial parks.
- Rent comparables. Verify rents with recent leases of similar nearby units, not asking rents alone.
- Permits. Confirm additions and conversions were permitted. An unpermitted garage conversion can cause insurance, appraisal and resale problems.
- Existing leases. If tenants are staying, review every lease, deposit and payment history, and request tenant estoppel letters on small multifamily purchases.
Texas landlord basics
Chapter 92 of the Texas Property Code governs most residential tenancies. It sets repair duties for conditions that materially affect health or safety, security device requirements such as door locks, and a deadline (generally 30 days after the tenant surrenders the unit) to refund the deposit or itemize deductions. Evictions are filed in justice court.
Financing options
- Conventional investment property loans, which generally need larger down payments than owner-occupied loans.
- DSCR loans, qualified on the property's income.
- Owner-occupied two- to four-unit purchases, including with FHA or VA financing, if you live in one unit. See my VA loan guide.
- Portfolio loans from local banks and credit unions, which can be flexible for experienced investors.
Model each option with the mortgage calculator against projected NOI, and sanity-check renting versus owning with the rent vs. buy calculator.
How I help investors
I co-founded a consumer products company and spent six years in key-account sales at PepsiCo, so I read a rental like an operating business. I build a pro forma with your real financing, stress-test rent, taxes and insurance, and walk through the risks before you commit. Start with my investment services, or book a call to review a property.
