What numbers do you look at first when analyzing a rental property?

Question

I’m curious how other investors approach the initial analysis of a rental property.

When you first look at a potential rental, which numbers do you check before going deeper into the deal?

For me, the main areas seem to be purchase price, expected rental income, operating expenses, vacancy, maintenance, CapEx, and estimated cash flow.

I’m especially interested in how experienced investors decide whether a property is worth analyzing further. Do you start with cash flow, cash-on-cash return, the purchase price compared with market value, or something else?

Also, how do you account for unexpected expenses when doing the initial numbers?

Alev Sharma · Answer

Good question, and in LA the order matters because most properties fail the very first test.

My quick filter, in this order:

1) Rent vs. total monthly payment. I estimate market rent from recent leases (not asking rents) and compare it to PITI at today's rates. If rent doesn't cover PITI plus roughly 25-30% for everything else, I need a clear value-add angle or I pass.

2) Property tax at the new price. In California the tax resets when you buy, to roughly 1.1-1.25% of the price depending on the area, plus any bonds or special assessments. A lot of new investors plug in the seller's old tax bill, which can be a fraction of what they'll actually pay.

3) Insurance. Get a real quote early, especially in fire-exposed areas. It has moved more than any other expense lately.

4) Price vs. comps. In LA a big part of the return comes from equity and value-add, so buying at or below market matters more than a thin monthly number.

5) Upside. Lot size and zoning for an ADU, unpermitted space that could be legalized, or below-market rents.

For unexpected expenses I use separate line items instead of one fudge factor: about 5% vacancy, 5-8% repairs, 5-10% CapEx depending on the age of the roof, plumbing and electrical, and a management fee even if I self-manage. On older LA housing stock I also scope the sewer line and look hard at the electrical panel and foundation before trusting any of the numbers.

Last thing: confirm early whether local rent rules apply to the property, since that changes how quickly rents can get to market.

Shiloh Lundahl · Answer

This is how I analyze every deal within a minute that comes to me. And this is in order.

1st - location. Is it located in an area where I buy.

2nd - what is the price point. Is it priced at an amount that I would buy?

3nd - look at pictures and read the description to see what it would likely cost to fix up the property.

4th - Ask the condition of these 7 things (roof, HVAC, electrical, foundation, plumbing, windows, smell).

5th - I tell them what I can buy it for and see if they accept.

Right now my decision to buy the property is dependent on if I can make $30,000 on a flip or walk into 20% equity if it is a buy and hold.

What numbers do you look at first when analyzing a rental property?

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