Evaluating a rental property deal

The difference between a good rental investment and a financial disaster is almost always in the analysis done before the purchase. Most bad deals looked great to someone who didn't run the numbers carefully. Here's the framework experienced investors use — not to predict the future, but to stress-test the present.

Step 1: Estimate gross rental income

Look at comparable rentals within a half-mile radius on Zillow, Rentometer, or local property management websites. Don't use the seller's claimed rents — verify independently. If the property is a duplex with two units renting at $1,200 each, gross potential rent is $28,800/year. Then subtract vacancy. Use 5% minimum for strong rental markets, 8–10% for average ones, and 10–15% if the neighborhood has high turnover. At 8% vacancy, your effective gross income is $26,496.

Step 2: Calculate operating expenses

• Property taxes: Pull from the county assessor's website. Don't trust listing data.
• Insurance: Get an actual quote for a landlord policy. Budget $1,200–$2,500/year for a single-family rental.
• Maintenance and repairs: Budget 5–10% of gross rent. Older properties need more.
• Capital expenditures (CapEx): Roof, HVAC, water heater, appliances — big-ticket replacements. Budget another 5–10% of gross rent in a reserve fund.
• Property management: 8–10% of collected rent if you hire a manager. If you self-manage, be honest about what your time is worth.
• Utilities: Any utilities you pay (water, trash, lawn care in some markets).
• HOA fees: If applicable, these can destroy cash flow. A $400/month HOA on a condo rental is a dealbreaker in most markets.

Step 3: Determine NOI and debt service

Net Operating Income (NOI) is your effective gross income minus all operating expenses (but not the mortgage). If your effective gross is $26,496 and operating expenses total $11,000, your NOI is $15,496. Now subtract your annual mortgage payment (principal + interest). On a $240,000 loan at 7% over 30 years, that's roughly $19,200/year. Your pre-tax cash flow is $15,496 minus $19,200 = negative $3,704. This deal does not cash-flow. Many deals in 2024-era interest rate environments don't. The question becomes whether appreciation, principal paydown, and tax benefits justify a small monthly loss.

Step 4: Stress-test the deal

Run the numbers three ways: your base case, a pessimistic case (rents 10% lower, vacancy 5% higher, one major repair in year one), and a worst case (extended vacancy, rate increase on refinance, major CapEx). If the pessimistic case causes you to drain savings or miss mortgage payments, the deal is too thin. Real estate is unforgiving to investors with no margin. The properties that look slightly boring on a spreadsheet — the ones with conservative assumptions that still work — are the ones that build wealth over 20 years.