How to Analyze a Rental Property (Step by Step)

Analyzing a rental doesn't have to take hours or a finance degree. It's a repeatable process. Here's the same sequence institutions use, simplified into steps you can run on any property.

Step 1 — Start with gross income

Add up all the income the property produces: monthly rent, plus any other income (parking, laundry, storage). Annualize it. This is your gross scheduled income.

Step 2 — Subtract vacancy

No property is rented 100% of the time. Budget 5–8% for vacancy even if it's full today — turnover and gaps happen. What's left is your effective gross income.

Step 3 — Subtract operating expenses

Everything it costs to run the property, before the mortgage: property taxes, insurance, maintenance, property management, HOA, utilities you pay, and reserves for CapEx (roof, HVAC). Effective gross income minus these is your Net Operating Income (NOI).

Step 4 — Calculate cap rate

Divide NOI by the purchase price. This is your cap rate — the property's return before financing, and your tool for comparing deals.

Step 5 — Add financing and find cash flow

Subtract your annual mortgage payment from NOI. What's left is your pre-tax cash flow. If it's negative, the property costs you money every month.

Step 6 — Calculate cash-on-cash and DSCR

• Cash-on-cash = annual cash flow ÷ total cash invested (down payment + closing + rehab).
• DSCR = NOI ÷ annual debt service. Below 1.0 means the property can't cover its own loan; most lenders want 1.25+.

Step 7 — Project it forward

A single year rarely tells the whole story. Project rent growth, expense growth and equity buildup over 5–30 years to see the real return, including eventual sale or refinance.

Run this sequence on every deal and you'll never again make a six-figure decision on a gut feeling. The math doesn't get emotional — that's the point.