How to Run a Rental Property's Numbers Before You Buy

Most rental surprises aren't surprises at all. They come from a few lines people skip or guess low, and from a single hopeful case that never got a cautious twin.

It sounds like you'd like a way to read any property quickly and honestly. Here's the method we use.

What rent can this home really earn?

Start with what similar homes nearby actually rent for, not what a listing hopes for. Look for homes with the same bedrooms, a similar size and condition, on similar streets.

Use a range, not a single number. Your cautious case uses the low end; your hopeful case uses the middle. If the deal only works at the top of the range, it's telling you something.

Which expenses do people skip?

Five lines cause most of the trouble:

• Vacancy. Even good rentals sit empty between tenants. Plan for some time every year.
• Repairs and maintenance. Older homes need more. Roofs, air conditioners and water heaters all have a lifespan.
• Insurance. In Florida it can be a large line, and it varies by roof age, construction, flood zone and wind protection. Get a real quote for the address.
• Property taxes. In Florida, taxes are reassessed when a home sells, and a rental doesn't get the homestead exemption the current owner may have. Don't use the seller's tax bill.
• Turnover. Cleaning, paint, small repairs and leasing time between tenants.

Add management if you'll hire a property manager, and association fees if there are any.

What do cash flow, cap rate and cash-on-cash mean?

Net operating income is the rent you collect minus vacancy and operating expenses, before any mortgage.

Cap rate is net operating income divided by the price. It's a quick way to compare properties as if you paid cash.

Cash flow is what's left each month after the mortgage too.

Cash-on-cash return is a year of cash flow divided by the cash you put in: the down payment plus closing costs.

None of these is the whole story, but together they show whether a property can carry itself.

How do I run a cautious case and a hopeful one?

Run the same property twice. The cautious case uses lower rent, more vacancy, higher repairs and a real insurance quote. The hopeful case uses the numbers you expect on a good year.

Look at the gap between them. That gap is your real risk. A property that still works in the cautious case is one you can sleep on.

Our deal analyzer puts every assumption where you can see it and change it. It takes about five minutes.

Condo or house?

Condos can be good rentals, and they come with extra homework. Ask first:

• Does the association allow rentals, and for how long?
• How healthy are its reserves?
• Are any building inspections or special assessments coming up?

Florida has added rules for condo buildings in recent years, including required inspections and reserve studies for many of them, which can affect association fees.

Ask for the association's reserve study and inspection reports before you make an offer.

Does the area matter as much as the numbers?

Numbers tell part of the story. The area tells the rest: how close a home is to the water, the bridges, the parks and the places people work, and how insurance and flood zones look on that street.

Our area pages describe each place we know well.

Your next step

A small first step

Run a property through the analyzer

Keep exploring

• Investor searches by estimated cap rate
• Portfolio advisory

When you're ready

Would you be opposed to a broker taking a careful first look at a property you're weighing? You can reach out here.