How to Analyze a Rental Property: A Beginner’s Guide

Investing in rental properties can be a powerful way to build long-term wealth, but not every property makes a good investment. Whether you're buying your first rental or evaluating your fifth, it’s crucial to know how to run the numbers and spot red flags before making a decision.

Here’s a step-by-step guide to analyzing a rental property in 2025.

1. Start With the 1% Rule (As a Quick Filter)

The 1% Rule says that a rental property's monthly rent should be at least 1% of its purchase price.

Example:

• Purchase Price: $300,000

• Target Rent: At least $3,000/month

If a property falls far below this benchmark, it may not cash flow—though this rule is just a rough filter and not a final decision-maker.

2. Calculate Monthly Rental Income

Determine the expected monthly rent based on:

• Comparable rentals (look at Zillow, Rentometer, local listings)

• Seasonality in short-term rental markets

• Vacancy risk (use 90% occupancy as a safe estimate)

Pro tip: Be conservative. Overestimating rent is a common investor mistake.

3. Estimate Monthly Expenses

Here are the main cost categories to include:

Expense Type	Estimated % or Amount
Mortgage (P&I)	Based on your financing terms
Property Taxes	Varies by location
Insurance	Landlord policy (not homeowner)
HOA Fees (if applicable)	$200–$400/month typical
Property Management	~8–10% of monthly rent
Maintenance & Repairs	~5–10% of rent/month
Vacancy Reserve	~5% of rent
Utilities	If you cover any for tenants
Capital Expenditures	Roof, HVAC, appliances, etc.

4. Run a Cash Flow Analysis

Monthly Cash Flow = Monthly Rental Income – Monthly Expenses

If the result is positive, the property may be worth exploring further.

Example:

• Rental Income: $2,000/month

• Expenses: $1,700/month

• Cash Flow = $300/month

A small positive cash flow can be acceptable if the property is in a high-appreciation area or you're focused on long-term wealth-building.

5. Calculate Your ROI (Return on Investment)

A. Cash-on-Cash Return

This shows the annual return on the cash you invested.

Formula:

Annual Cash Flow ÷ Total Cash Invested × 100

Example:

• $15,000 total cash invested

• $3,000 annual cash flow

• Return = 20%

B. Cap Rate (For Comparing Properties)

Used to compare properties regardless of financing.

Formula:

Net Operating Income (NOI) ÷ Purchase Price × 100(NOI = Rent – Operating Expenses, excluding mortgage)

6. Consider Appreciation and Tax Benefits

Beyond monthly income, long-term investors should also factor in:

• Property appreciation potential (based on local growth trends)

• Tax benefits (like depreciation, mortgage interest deductions)

• Equity building as tenants pay down the loan

These don’t show up in your monthly cash flow—but they can dramatically boost your net worth over time.

7. Evaluate Location and Tenant Demand

Look for:

• Job and population growth

• Proximity to employers, schools, and amenities

• Crime rates and school ratings

• Historical rent growth

A cash-flowing property in a declining area is often more risk than reward.

Final Thoughts

Analyzing a rental property goes far beyond just checking the price and rent. It takes thoughtful planning, realistic estimates, and a big-picture view of how the property fits into your investment goals.