Before you make an offer on a rental, you should be able to answer one question with confidence: will this property pay for itself, and how much will it pay me for the cash I put in? This guide walks through a simple, repeatable way to answer it.
The numbers below are a framework, not a guarantee. Always verify rents, taxes, insurance, and repair costs for your specific market.
1. Estimate realistic rent
Start with what the property will actually rent for, not what the listing claims.
- Pull 3–5 comparable rentals (same bedroom/bath count, similar condition, within about a mile).
- Check active listings and what has actually leased recently. Asking rent isn't achieved rent.
- Talk to a local property manager. They'll usually tell you what a unit will realistically fetch.
2. List every operating expense
Operating expenses are the costs of running the property, not including your mortgage payment.
| Expense | Typical estimate |
|---|---|
| Property taxes | Actual figure from county records |
| Insurance | Get a real quote |
| Vacancy | 5–8% of rent |
| Repairs & maintenance | 5–10% of rent |
| Capital expenditures (roof, HVAC, etc.) | 5–10% of rent |
| Property management | 8–10% of rent (budget it even if you self-manage) |
| HOA, utilities, lawn, snow | Actual amounts, if the owner pays them |
The most common beginner mistake is leaving out vacancy, CapEx, or management because "it won't happen to me." Over a long hold, it will.
3. Calculate the key metrics
Net Operating Income (NOI): rent minus operating expenses. This is what the property earns before financing.
Cap rate = annual NOI ÷ purchase price. Use it to compare properties regardless of how they're financed.
Cash flow = NOI minus the mortgage payment (principal and interest). This is what actually lands in your pocket.
Cash-on-cash return = annual cash flow ÷ total cash invested (down payment, closing costs, and up-front repairs).
DSCR (Debt Service Coverage Ratio) = NOI ÷ annual debt payments. Lenders typically want 1.20 or higher. Below 1.0 means the property can't cover its own loan.
4. Worked example
A single-family home listed at $250,000, renting for $2,300/month, bought with 25% down at a 7% 30-year fixed rate.
| Item | Amount |
|---|---|
| Down payment (25%) | $62,500 |
| Closing costs | $7,500 |
| Total cash invested | $70,000 |
| Loan amount | $187,500 |
| Monthly mortgage (P&I) | $1,247 |
Monthly operating expenses
| Expense | Monthly |
|---|---|
| Property taxes | $250 |
| Insurance | $120 |
| Vacancy (5%) | $115 |
| Repairs (5%) | $115 |
| CapEx (5%) | $115 |
| Management (8%) | $184 |
| Total | $899 |
Results
| Metric | Result |
|---|---|
| NOI | $1,401/mo · $16,812/yr |
| Cap rate | 6.72% |
| Cash flow | $154/mo · $1,843/yr |
| Cash-on-cash return | 2.63% |
| DSCR | 1.12 |
The property cash flows, but thinly. A DSCR of 1.12 leaves little room for a bad year, and a 2.6% cash-on-cash return is below what many investors target. That doesn't make it automatically a bad deal: appreciation, principal paydown, and tax benefits all add return. But it tells you exactly what you're betting on, and what price or rent would make the numbers work.
5. Quick screening rules (and their limits)
- The 1% rule: monthly rent of at least 1% of the purchase price. It's a fast filter, but it's hard to meet in many markets and ignores taxes and insurance entirely.
- The 50% rule: assume operating expenses will be about 50% of rent. It's useful for a first pass, but replace it with real numbers before you make an offer.
Use these rules to decide which properties deserve a full analysis, never to decide which ones to buy.
6. Before you make an offer
- Stress-test the deal: what happens if rent comes in 10% lower, or you lose two months to vacancy?
- Get the real tax bill and an insurance quote.
- Work through the Property Due Diligence Checklist.