How to analyze a rental property: a beginner's step-by-step guide
- Estimate the rent honestly. Look at 3–5 comparable rentals nearby, not the seller's number.
- List every operating cost. Property tax, insurance, HOA, plus percentages of rent for vacancy (5%+), maintenance (5–10%) and management (8–10%).
- Calculate NOI. Rent minus operating costs, before the mortgage.
- Add the mortgage. Use your down payment, rate and term to get monthly principal & interest.
- Find monthly cash flow. NOI minus mortgage. Negative means you pay every month to own it.
- Check the return ratios. Cap rate (NOI ÷ price), cash-on-cash (annual cash flow ÷ cash invested), DSCR (NOI ÷ mortgage) and the 1% rule.
- Stress-test it. What if rent is 10% lower or rates are 1 point higher? A good first deal still cash-flows.
- Verify before you offer. Get insurance quotes, confirm taxes, and get an inspection.
Worked example
A $200,000 home, 20% down, 7% for 30 years, renting for $2,200 with $2,400/yr tax, $1,200/yr insurance, 5% vacancy, 5% maintenance and 8% management: mortgage ≈ $1,064/mo, operating costs $696/mo, cash flow ≈ +$440/mo, cap rate 9.0%, cash-on-cash 11.5% (with $6,000 closing costs), DSCR 1.41, passes the 1% rule. FirstDoor scores it Good.