What Number Do You Trust Most When Evaluating a Rental?

Question

Every investor seems to have a different number they focus on first when analyzing a rental property.

Some look at cash flow, while others focus on cash-on-cash return, cap rate, equity, or purchase price compared with market value.

I’m curious which number you find most useful during the initial screening stage.

For example, if a property has:

• Strong monthly cash flow but a low cash-on-cash return
• A good cap rate but significant deferred maintenance
• Strong appreciation potential but negative cash flow
• High projected rent but uncertain rental demand

Strong monthly cash flow but a low cash-on-cash return

A good cap rate but significant deferred maintenance

Strong appreciation potential but negative cash flow

High projected rent but uncertain rental demand

Which factor would make you investigate the property further, and which one would make you move on?

Also, do you calculate these numbers yourself from the listing information, or do you use a specific spreadsheet, calculator, or analysis tool?

Would be interested to hear how different investors approach the first 10–15 minutes of analyzing a deal.

Greg Scott · Answer

You said "rental", and then mix single family and commercial terminology without clarification. Because the valuation procedures are different for single family (including duplex, triplex, quad) and commercial multifamily (5+ units) the focus will be somewhat different.

For single family, I would say the two most important are cashflow, return on equity, and, at purchase, equity capture. Those are the most reliable to predict if you know what you are doing. Of course you could boost cashflow by reducing debt, but that hurts your RoE. If you get both good cashfow and good RoE, that is a good deal. Getting strong equity capture is a nice bonus.

For apartments, I would also say cashflow and return on equity. Since the way to grow equity in commercial multifamily is to improve NOI, I would also be searching for opportunities to do that. It is often counterproductive to improve NOI by just cutting costs, so I normally look for upside on revenue.

Nobody can accurately predict appreciation. I got in a big argument on this forum 7 years ago with a group that said Austin, TX real estate prices were clearly going to shoot to the moon. (They were wrong.). Cap rate is really a commercial term, not terribly relevant to SF unless you are using a DSCR loan, and even if you want to argue with me that cap rates are a valid SF metric, I wouldn't buy an apartment based on cap rate either. That metric is just a high-level short-cut to gauge pricing. Cashflows effectively incorporates both the cap rate and cost of debt, so covers that and RoE, again, provides a counterbalance to just taking on less debt to improve cashflow.

Adam Tafel · Answer

Purchase price is everything, a good purchase price can and will justify ANY other metrics

Jaron Walling · Answer

It's a combination of all three. For us the capital left over after refinancing is huge. We have successfully recycled our capital (abate slowly) but I'm a dad with two small kids, and new job. I'm not chasing the hottest trend or deal that traps $20k in it.

The silent issue right now it downward pressure on the ARV. With transactions slowing, high DOM, and prices staying mostly flat it adds some risk. It's so important to buy correctly like @Adam Tafel mentioned. If you don't and the appraisal comes back low you'll be stuck. REI comes with risk but so does buying stock. The difference is you're the captain, steer the ship, and get to a destination. For other types of investing your just a passenger.

Jaron Walling · Answer

@Halenah Eva From a mid west prospective it's a combination of most of the things you mentioned. My market is still street-by-street. If you don't know the neighborhoods and pockets or have a local guiding you it's really just shooting blind; the numbers mean nothing.

It's your job to run the numbers and then compare them to what other investors are seeing. Listings and wholesaler information can be vague and misleading. I can fudge my numbers (rents, capex, vacancy expectations) on any deal to make it look pretty. People do that all the time! Example; a proforma will say rents are $1500, when I know market is $1300-1400 at the most. That $100-200 difference affects the entire outlook for the deal.

Most properties right now don't CF. The majority of markets are in stalemate. Prices are high and interest rates equally high. Over 50% of mortgage holders have fixed rates 4% or lower. There's almost zero reason to sell a house if you're in that position. Keep that in mind when you're looking for your first opportunity. It's a very odd time in the housing market. In my opinion the BRRRR strategy never dies but it requires an advanced level of REI understanding; at minimum some contractor "hand holding" and not getting ripped off on labor. If you can successfully do a BRRRR you'll be much better off. Instead of "strong appreciation potential but negative cash flow" the goal is value add (equity generation) and CF or at least break even. "Significant deferred maintenance" is leverage to make lower offers. Recycle most of your capital and call it a success. Anything beyond that requires additional risk most new investors should avoid.

There are other strategies that generated more cash flow including STR, MTR, and RBR. They all require additional PM and time. You could combine one of those strategies with a BRRRR and be in great position. It depend on how valuable your time is. Cheers.

Halenah Eva · Answer

That makes a lot of sense, especially the point about not wanting to have a large amount of capital trapped in a deal. Being able to recycle capital after refinancing seems like a major part of making the strategy scalable, while still keeping enough of a margin for unexpected issues.

I also hadn’t thought as much about the downward pressure on ARV when transactions slow down. A lower-than-expected appraisal could definitely change the entire refinance plan, even if the renovation itself goes according to budget.

When you’re estimating ARV before buying, how conservative do you usually try to be? Do you mainly rely on recent sold comps, or do you also apply a discount to your estimated ARV to protect against a lower appraisal?

Halenah Eva · Answer

That’s a good point. Buying at the right price can create a lot more room for the other numbers to work, especially when there is enough margin between the purchase price and the property’s actual market value.

I’m curious though—when you say a good purchase price can justify any other metrics, do you mainly determine that through equity capture, comparable sales, or the potential value after renovations?

Halenah Eva · Answer

That’s a really helpful distinction between single-family rentals and commercial multifamily. I hadn’t considered how much the analysis can change depending on the property type, especially when it comes to valuation and the role of NOI.

I also like your point about balancing cash flow with return on equity. Reducing debt may improve monthly cash flow, but it can also lower the return on the equity invested, so looking at both gives a much clearer picture of the deal.

Your point about focusing on revenue upside rather than simply cutting expenses in multifamily is interesting as well. It seems like understanding the local rental market is especially important when estimating that potential upside.

For a newer investor, which of these numbers would you recommend learning to calculate first: cash flow, return on equity, or equity capture?

Halenah Eva · Answer

That’s a great point about the market being so dependent on the specific neighborhood. I agree that the numbers can look very different when the rent assumptions or expense estimates aren’t based on what is actually happening on that particular street or pocket.

The example of $1,500 projected rent versus a realistic $1,300–$1,400 is especially important. A small difference in rent can have a much bigger impact on cash flow and the overall return than it initially appears.

I also found your point about deferred maintenance being potential leverage for negotiating the purchase price interesting. For someone getting started, it seems like accurately estimating the renovation cost is just as important as finding the right purchase price.

When you’re evaluating a potential BRRRR deal, what do you usually focus on first—the after-repair value (ARV), renovation budget, or the amount you expect to have left invested after refinancing?

What Number Do You Trust Most When Evaluating a Rental?

8 Replies