How to Analyze a Rental Property Deal in 5 Simple Steps

Description: Evaluating a rental property doesn’t have to be complicated. Learn 5 simple steps to analyze key metrics like cap rate, cash-on-cash return, and net operating income (NOI). Use our built-in calculators to instantly see potential returns. Powered by MyDoorsPro.

Step 1: Determine the Purchase Price and Down Payment

Start by knowing the property’s purchase price and how much you will put down. This forms the foundation for calculating ROI metrics.

Step 2: Calculate Net Operating Income (NOI)

NOI is the income from the property after subtracting operating expenses but before mortgage payments. Formula:

• NOI = Gross Rental Income - Operating Expenses

Step 3: Calculate Cap Rate

Cap rate shows the property’s annual return based on purchase price. Formula:

• Cap Rate = (NOI / Purchase Price) x 100

Step 4: Calculate Cash-on-Cash Return

Cash-on-Cash return measures your return based on your actual cash invested. Formula:

• Cash-on-Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100

Step 5: Assess Risks and Market Conditions

Always evaluate the local market, vacancy rates, and potential maintenance costs. Factor in economic trends, tenant quality, and financing terms. Numbers tell part of the story, but context matters.

Analyzing rental properties with these steps helps you make informed investment decisions, reduce risks, and maximize returns. Use our calculators to experiment with different scenarios and see the impact instantly.