How to Analyze a Rental Property Deal

Almost every bad first rental was analysed. The analysis was just missing four expense lines, and those four lines are usually the entire difference between a good deal and a mediocre one.

TL;DR: Rent minus mortgage is not cash flow. Subtract taxes and insurance at your post-sale numbers, then vacancy, then maintenance, then capital reserves, then management — even if you self-manage, because your time is not free and you will eventually hire someone. Do it in that order, on paper, before you get emotionally attached. A property advertised as cash flowing $600 typically produces $100–$200 once the four missing lines are honest.

The worked example

A listed single-family: $265,000 asking, market rent $2,150, taxes on the current owner's bill $2,400/year.

Step 1 — the income

Start with the rent the property will actually achieve, not the asking rent on similar listings. Ask a local property manager what they are signing leases at this month. Achieved rents run below asking rents, and the difference is your margin.

Say $2,100 is the honest number.

Step 2 — the debt service

25% down, 30-year fixed at 7.0%:

Line	Amount
Purchase price	$265,000
Down payment (25%)	$66,250
Loan amount	$198,750
Principal and interest	$1,322/mo

Check your own scenario on the mortgage payment calculator. Which loan you can get changes this line a lot — conventional, FHA or DSCR is worth settling first.

Step 3 — taxes and insurance at your numbers

This is the first place beginners lose money.

Taxes reassess. Many jurisdictions reassess at the sale price. The seller's $2,400 bill on a long-held property can become $3,600 the year after you buy. Look up the local millage rate and apply it to the purchase price, or call the assessor. The reassessment risk scorecard shows where the jump is largest.

Insurance is not the seller's premium. Landlord policies cost more than homeowner policies, and premiums have moved sharply in several states. Get a real quote on the real address.

Line	Seller's number	Yours
Property taxes	$200/mo	$300/mo
Insurance	$95/mo	$165/mo

Step 4 — the four lines that get left out

Vacancy. No property is occupied 100% of the time. Use 5–8% of gross rent, higher in weaker submarkets. At 6% on $2,100 that is $126/month.

Maintenance. Ongoing repairs: the water heater, the disposal, the tenant's locked door. Rule of thumb is 5–10% of rent, weighted by age. On a 1970s house, use 8% — $168/month.

Capital reserves. Roofs, HVAC, water heaters, flooring, exterior paint. These do not happen monthly, but they happen. A roof is $12,000 on a 20-year life — $50/month by itself. Use 5–8% of rent as a reserve. At 6%, $126/month.

Management. 8–10% of collected rent, plus a leasing fee of half to a full month per turn. Include it even if you self-manage, for two reasons: it is what the property costs to run, and it is what you will pay when you get tired, move, or buy a fourth one. At 9%, $189/month.

Step 5 — put it together

Line	Monthly
Gross rent	$2,100
Vacancy (6%)	−$126
Effective income	$1,974
Principal and interest	−$1,322
Property taxes	−$300
Insurance	−$165
Maintenance (8%)	−$168
Capital reserves (6%)	−$126
Management (9%)	−$189
Cash flow	−$296

The naive version of this analysis — $2,100 rent, $1,322 payment, $295 taxes and insurance — shows $483 a month. The honest version is negative $296. Same property, same rent, $779 of difference, all of it in lines the listing does not mention.

That is not a trick. That is what the four missing lines are worth, and it is why so many first rentals disappoint.

What the numbers mean

Three metrics, in the order they are useful:

Cash flow. Dollars per month after everything. It determines whether you can hold the property through a bad year. For a first rental, positive is the goal, and $150–$300 per unit is a realistic target in most secondary markets.

Cash-on-cash return. Annual cash flow ÷ cash invested. On this deal, if cash flow were $200/month against $79,000 in (down payment plus $13,000 closing), that is $2,400 ÷ $79,000 = 3.0%. Run yours on the ROI calculator.

Cap rate. Net operating income ÷ price, ignoring financing. Useful for comparing properties against each other and against the market, not for deciding whether you can afford one. The cap rate calculator handles it.

Cash flow keeps you solvent; cash-on-cash tells you whether the capital is well used; cap rate tells you whether you are paying a sensible price. You need all three, and beginners usually look at only the first.

Making a negative deal work

The example above is not automatically a pass. Three levers:

Offer less. At $232,000 instead of $265,000, the payment drops about $165 and the deal moves close to breakeven. The listing price is an opinion.

Put more down. More equity, lower payment, lower return on that capital. Sometimes right, often not — you are buying cash flow with capital that could buy another property.

Find higher rent per dollar. Usually the real answer. If nothing in the submarket clears with honest numbers, the submarket is the problem, not your analysis. Go back to choosing a market.

What is not a lever: deciding the expense assumptions were pessimistic. They were not.

Then verify what you assumed

The analysis is a hypothesis. Diligence tests it:

• Rents. A property manager's opinion in writing, plus three genuinely comparable leased units.
• Taxes. The assessor's office, at your purchase price.
• Insurance. A bound quote, not an estimate.
• Condition. An inspection, and a contractor's estimate for anything it flags. The walkthrough checklist covers what to look at before you spend money on an inspection.
• Existing leases. If tenanted, read every lease and the payment history. You inherit both.

The deal-kill playbook covers what should end a deal outright.

A five-minute screen

Before doing any of this, filter fast. Monthly rent divided by price:

Ratio	Action
Above 0.9%	Full analysis, quickly
0.7–0.9%	Full analysis
0.5–0.7%	Only if you want appreciation and can fund the shortfall
Below 0.5%	Skip

The example above is 0.79% — worth analysing, and it still came out negative at asking. That is the normal outcome, and it is why volume matters. Screening thirty properties to fully analyse five to offer on one is an ordinary week.

Final take

The discipline is subtracting the four lines nobody advertises: vacancy, maintenance, capital reserves and management. Do it every time, before you like the property. Most deals fail this test, which is correct — the analysis is not there to justify a purchase, it is there to eliminate the thirty properties that would have cost you money.