How to Analyze a Rental Property

1. Income assumptions

Estimate gross scheduled rent from comparable rentals in the same submarket, unit type and condition. Then subtract a vacancy allowance reflecting realistic turnover, not a best case. Add any other income the property genuinely produces, such as parking or storage, only if it is verifiable.

2. Operating expenses

Operating expenses commonly include:

• Property taxes and property insurance.
• HOA dues, where applicable.
• Property management, whether paid to a manager or accounted for as the value of your own time.
• Routine repairs and maintenance.
• Utilities the owner pays, plus turnover and leasing costs.
• Capital reserves for roof, HVAC, water heater and other long-lived components.

3. Net operating income

Net operating income (NOI) is effective gross income minus operating expenses. It deliberately excludes mortgage payments, so it describes the property's performance independent of how you finance it. NOI is the input to cap rate.

4. Financing and cash flow

Subtract annual debt service from NOI to get cash flow before taxes. Financing terms for investment property commonly differ from owner-occupied terms in down payment, rate and reserve requirements; confirm your actual terms with a lender rather than assuming.

5. Stress-test the deal

Re-run the analysis with rent lower than expected, vacancy higher than expected, and one significant capital expense in the first two years. A deal that only works in the base case is a fragile deal.

Frequently asked questions

Should I include management if I self-manage?

Many investors do, so the analysis reflects the property's performance rather than the value of unpaid labor, and so the numbers still hold if you hire a manager later.

What expense ratio should I assume?

Rules of thumb vary widely and can mislead. Build expenses line by line from actual tax bills, insurance quotes, HOA dues and realistic maintenance estimates.

Does appreciation belong in the analysis?

Future appreciation is not predictable. Evaluate the deal on income and expenses, and treat any appreciation scenario as a separate sensitivity, not an assumption.