Stop Guessing, Start Analyzing
The difference between investors who build wealth and those who struggle is almost always underwriting discipline. Analyzing a rental property correctly takes about 20–30 minutes and tells you exactly what returns to expect at different assumptions.
Step 1: Establish Gross Rental Income
Research comparable rentals in the immediate area — not just the city, but the specific neighborhood and property type. Zillow, Rentometer, and local property managers are all useful. Be conservative: use the lower end of the range, not the optimistic top.
Step 2: Calculate Vacancy Loss
No property is rented 100% of the time. Use a vacancy factor of 8–10% (roughly one month per year). Multiply your gross rent by 0.9 to get Effective Gross Income. Example: $1,500/month x 12 months x 0.9 = $16,200 EGI.
Step 3: Calculate Operating Expenses
Add up all annual operating costs: property taxes, insurance, property management (8–10%), maintenance reserves ($1,200–$1,800/year minimum), and any HOA or owner-paid utilities. A common benchmark: operating expenses often run 40–50% of gross rent.
Step 4: Calculate Net Operating Income (NOI)
NOI = EGI minus Operating Expenses. This is the property's income before debt service. Cap Rate = NOI divided by Purchase Price. A 6–8% cap rate is generally acceptable for long-term buy-and-hold in most secondary markets.
Step 5: Calculate Cash-on-Cash Return
After subtracting annual mortgage payments from NOI, you get annual cash flow. Cash-on-Cash Return = Annual Cash Flow divided by Total Cash Invested (down payment + closing costs + initial repairs). A target of 6–10% cash-on-cash is reasonable for most markets.
Taso Spathos
REALTOR® | CA Lic. 02094226
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