How to run the numbers on a rental property

Estimate the rent

Look at similar rentals nearby on Zillow, Apartments.com or Facebook Marketplace, and talk to a local property manager. Use what similar homes actually rent for, not the asking rent on the highest listing.

Count every expense

• Property taxes and insurance.
• Property management, often 8–10% of rent.
• Maintenance and repairs: budget around 5–10% of rent.
• Vacancy: budget a month or so a year.
• Capital expenses: money set aside for big items like a roof or HVAC.
• HOA fees and any utilities you pay.

The numbers that matter

• Net operating income (NOI) = rent − operating expenses (not including your mortgage).
• Cap rate = NOI ÷ purchase price. A quick way to compare properties.
• Cash flow = NOI − mortgage payment.
• Cash-on-cash return = yearly cash flow ÷ the cash you put in.
• DSCR = NOI ÷ yearly mortgage payments. Many rental lenders want 1.2 or more.

The 1% rule

A quick screen: monthly rent should be at least 1% of the purchase price plus repairs. A $90,000 house should rent for about $900 a month or more. It’s a filter, not a verdict. Always run the full numbers.

Worked example

A house costs $85,000 with $10,000 of repairs and rents for $1,100 a month ($13,200 a year). Taxes, insurance, management, maintenance, vacancy and capital expenses come to about $5,300 a year, so NOI is about $7,900 and the cap rate on $95,000 all-in is about 8.3%.

Questions

General information, not legal, tax or financial advice. Check the numbers on every deal yourself.