Determining what is a good deal on a long term rental
Member since 2025 · 3 posts · 1 vote
What metrics do you look for when determining whether a long term rental purchase is a good deal? Ideally it’s cash positive, but that could be achieved by just putting more money down. Should you aim to be cash positive with 20% down? 1% rule seems near impossible right now.
The 1% rule is dead right now -- you're right to throw that out. It was a screening tool from 2012, not a 2026 reality. The real metrics that matter are cap rate and cash-on-cash return after all expenses.
I look for deals that hit at least 5% cap rate on the back of the envelope (NOI / purchase price), but more importantly, what's the actual cash flow after you account for vacancy (I use 7-10%), maintenance reserves (1% of value annually), and property management if you're not self-managing. A property that looks great at 5.5% cap on paper but only throws off 50/month after real expenses is a dead deal.
The down payment question matters a lot here. With 20% down, you're in conventional territory, which means better rates and terms. But that doesn't mean you should overpay to hit some magical down payment number. A deal that needs 25% down to work is a signal that the acquisition price is wrong, not that you should save more. Flip the logic: find deals with solid fundamentals (3-4% cash on cash minimum after ALL reserves), then figure out your down payment from there.
Are you looking in a specific market or price range? That'll help clarify what "good deal numbers" actually look like there.
What class of property are you looking at? That will determine tenant pool, vacancy, evictions etc.
The 1% rule is basically dead in most markets. We're running rentals at 0.5-0.7% in solid appreciation markets, which means we're expecting equity growth, not monthly cash flow magic.
What matters more: aim for 20% down and positive cash flow of at least 00-300/month after all expenses (mortgage, taxes, insurance, vacancy at 7-10%, maintenance reserve at 10%). If you can't hit that with 20% down, the deal probably isn't strong enough. The PMI hit on 10% down usually eats your cash flow anyway, so just bite the bullet and save for 20%.
Here's the mental model: if you're putting 50% down just to get positive cash flow, you're optimizing for the wrong metric. Better to buy a cheaper property with 20% down and solid cash flow than to overpay and self-fund your way to break-even.
What market are you looking at? That's going to drive whether 0.7% cash-on-cash return (with appreciation upside) is acceptable or if you need immediate cash flow to make it work?
Yes. Aim for cash positive at 20% down for exactly the reason you already stated.
Here’s the thing about a bigger down payment…it can make almost anything cash flow. The property doesn’t get any better. You’re just putting more of your own money in to cover a gap the property can’t cover on its own.
Treat 20% as a fixed number, not something you keep adjusting until the deal finally works. If a deal only cash flows at 35% down, the price is wrong.
(If you decide to put more down because it makes sense for your money, that’s fine. Just know it doesn’t tell you anything about the deal.)
Now, metrics.
I start with the exit, before I look at the property at all. Cash flow, appreciation, forced equity for a refinance (the BRRR), or a quick turn. Each one has a different criteria.
For a long-term hold, I use cash on cash return…if your offer is accepted, during due diligence use expenses you’ve verified yourself, not the ones the seller gave you.
The verification is where most of your answer comes from. There are two expenses I want to specifically bring to your attention.
Taxes. Most jurisdictions reassess on sale. A seller who's owned since 2004 is paying on a 2004 value, and you'll be paying based on what you just paid. That new number will impact your NOI directly.
Insurance. Get a quote instead of using a rule of thumb. On older properties, the carrier is looking at roof age, panel brand, plumbing material, and prior claims. Any one of those can change the premium enough to change your answer. Some carriers will decline the property outright…which is a free phone call that ends a lot of deals early. If you haven’t called an insurance agent in your target market yet, do that this week.
Next, the 1% rule.
I use it for one thing: ruling out markets. It’ll never tell you a property is good. What it tells you is which markets can’t cash flow at all, so you stop spending an entire weekend on them.
When you say it feels near impossible right now, I’d look at where you’re shopping. Just as an illustration, a $150,000 duplex renting for $1,700 total is worth a closer look. Most coastal markets won’t come even close, and that’s why it’s useful. To save you time.
One more thing that’ll save you money later. Occupied doesn’t necessarily mean they’re paying.
Physical occupancy is people in units. Economic occupancy is rent that is actually being paid. Those two can be very far apart on the same rent roll.
Before you get attached to a cash on cash number, ask for the actual leases, 12 months of payment history, and the bank deposits that back it up. Anyone can type up a ledger. Deposits are proof.
All of this is free to check, and it kills more deals than the inspection ever will. Do the financial due diligence first so you don’t waste money on an inspection that wouldn’t matter anyway if the financials don’t work.
I hope that helps.
Stacy
benjamin the others gave you solid advice on the traditional metrics. i'll add a different angle since i buy most of my properties at tax deed auctions in florida, which changes the math a bit.
when you're buying at auction, you're paying cash so the down payment question doesn't apply. what matters is your total return on the cash you put in. i look at it more simply - what's the property worth after i get it rent-ready, what can it rent for, and what did i pay all in? if i can get a 10%+ return on my total investment (purchase + rehab + closing costs) within the first year of renting, it's a deal i'll do.
but here's the thing that stacy nailed - the numbers on paper are only half the battle. the real skill is in the verification. at auction you can't inspect the inside, so you're making assumptions about rehab costs. i've learned to be conservative there. if i think a property needs 20k in work, i budget 30k. the surprises are almost always on the inside - plumbing, electrical, hvac stuff you can't see from the curb.
on the 1% rule - in the markets i'm working in south florida, you're right that it's basically dead for traditional purchases. but at auction you can sometimes get properties for 50-60% of market value, which changes the equation completely. a property that would rent for 1800 and cost 300k on the MLS might go for 150k at auction. suddenly the numbers work even with today's insurance and tax rates.
the biggest mistake i see new investors make is focusing too much on the purchase price and not enough on the carrying costs. property insurance in florida has gotten insane - i've seen premiums triple in two years. taxes reassess on sale like stacy mentioned. those two line items alone can kill a deal that looked great on the back of a napkin.
my advice: run the numbers conservatively, verify every expense with actual quotes (not rules of thumb), and make sure you have enough cash reserve to cover 6 months of vacancy and repairs. the deal isn't what you buy it for - it's what it actually costs you to hold it.
Cash on cash is the right lens, but the verification step usually hinges on three line items sellers understate: taxes (which reassess at your purchase price, not theirs), insurance (get a real quote on the actual roof age and claims history, not a rule of thumb), and turnover. For that last one, pull the actual lease and rent roll and see what the unit rented for versus market - a tenant 15% under market means your first year has a vacancy plus make-ready you didn't budget. I'd also run the deal at a 10% maintenance and 8% capex reserve rather than whatever the pro forma shows, since that's what separates a deal that pencils from one that only pencils on paper.