How to analyze a rental deal
- Enter the purchase details. Price, down payment, rate, and term. Investment loans usually need 20% to 25% down and price slightly above primary-residence rates.
- Set realistic rent. Check nearby comps, then add any parking or laundry income.
- Dial in expenses. Tax, insurance, maintenance, vacancy, management, and HOA. These decide whether the deal works.
- Read the metrics. Cash flow first, then cap rate, cash-on-cash return, and the 1% rule as sanity checks.
Key metrics every investor should know
- Net operating income - Gross income minus operating expenses, before the mortgage. It shows what the property earns on its own.
- Cap rate - NOI divided by purchase price. Useful for comparing properties; 6% is solid in many markets, 8%+ is strong.
- Cash-on-cash - Annual cash flow divided by total cash invested. It measures the return on your own money after financing.
- Cash flow - What is left after every bill, including the mortgage. Positive is the goal, but equity build and tax treatment matter too.
- 1% rule - Monthly rent should be at least 1% of the price. A quick filter, not a substitute for a full analysis.
Common mistakes new landlords make
- Ignoring vacancy - Every property sits empty between tenants. Budget 5% to 8% of rent.
- Underestimating maintenance - Roofs, HVAC, and plumbing break. Plan 1% to 2% of value per year.
- Skipping management - Even self-managers should test the deal with an 8% to 10% fee included.
- Overpaying on emotion - A beautiful house that loses $300 a month is a liability, not an investment.
Frequently asked questions
What is cash flow in rental property investing?
Cash flow is what remains after every monthly bill, including the mortgage. Positive cash flow means the property pays for itself; negative means you fund the difference. Even $100 to $200 positive matters, because you also build equity and may get tax benefits.
What is a good cap rate?
It depends on the market and risk. A 5% to 7% cap rate is common for stable properties in strong metros; 8% or more often means higher yield with more risk or a slower-growth area. Compare similar properties in the same market, not across cities.
What cash-on-cash return should I target?
Many investors look for 8% to 12%. Below 6% is usually thin once you account for vacancies and repairs; above 12% can be attractive but often signals higher risk or optimistic assumptions. Use conservative rent and expense estimates.
What is the 1% rule?
Monthly rent should equal at least 1% of the purchase price. A $300,000 property would need $3,000 rent. It is a fast screening filter, not a full analysis, and it is hard to meet in expensive coastal markets.
How much should I budget for vacancy and maintenance?
Plan 5% to 8% of rent for vacancy and 1% to 2% of property value per year for maintenance. Older homes and hot markets with high turnover need more. Skipping these is the most common reason a deal looks better on paper than in practice.
Should I include a property manager fee if I self-manage?
Yes, at least in a stress test. Management typically runs 8% to 10% of rent, and including it shows whether the deal still works if you move or decide to delegate. Self-management is a job, not a permanent discount.
Estimates for screening only. Actual rents, expenses, financing, and tax treatment vary by property and market. Verify with local comps and a lender before making an offer.
