How to Analyze a Rental Property (Before You Buy)
Three numbers tell you whether a rental is a good deal: cap rate, cash flow, and cash-on-cash return. Here's what each means and how to use them together.
A rental property either makes you money or quietly drains it — and the difference comes down to a few numbers you can run before you ever make an offer. Master three of them and you'll spot good deals fast and avoid the money-losers.
1. Net operating income (NOI)
Everything starts with NOI: the property's income after running costs, but before the mortgage. Take the gross annual rent, subtract a vacancy allowance (5–10% is typical), then subtract operating expenses — property taxes, insurance, maintenance, and management. What's left is your NOI. Get this realistic; new investors routinely understate expenses, which makes a bad deal look good.
2. Cap rate (compares properties fairly)
The capitalization rate is NOI divided by the purchase price. A property with $18,000 of NOI on a $300,000 price has a 6% cap rate.
Because cap rate ignores financing, it lets you compare two properties on equal footing, regardless of how each is funded. Cap rates of roughly 6–10% are often considered solid, but it varies by market — a lower cap rate usually signals a safer, higher-demand area, a higher one more income but often more risk. Compare against similar local properties, not a national rule.
3. Cash flow + cash-on-cash return (your real return)
Cap rate is great for comparison, but it doesn't tell you what you'll actually pocket once a mortgage is involved. For that, you need two more figures:
- Monthly cash flow = effective rent − operating expenses − mortgage payment. Positive means the property pays you each month; negative means you feed it.
- Cash-on-cash return = annual cash flow ÷ the cash you invested (mainly your down payment), as a percentage. This is the number most buy-and-hold investors optimize for, because it reflects the return on the money actually at risk — and leverage from the mortgage can make it strong even on a modest property.
Putting it together
A property worth buying usually shows positive monthly cash flow and a healthy cash-on-cash return, with a cap rate in line with its area. If the cash flow is negative, you're betting entirely on appreciation — riskier ground.
Don't forget what the numbers miss
Cash flow isn't the whole return. Appreciation, loan paydown (your tenants building your equity), and tax benefits all add to it but aren't captured in these metrics. Equally, a rosy spreadsheet can hide underestimated repairs or vacancy. Use realistic inputs and treat the analysis as a screen, not a guarantee.
Run the numbers
Use the rental property calculator to get monthly cash flow, cash-on-cash return and cap rate in one go, or the cap rate calculator to quickly compare properties. To pressure-test the financing, the mortgage calculator breaks down the payment.