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.

John Leland · Answer

It starts with figuring out if you are a profit oriented investor or a security oriented investor and deciding that gets you going in the right direction. Each path is different with different steps. It may be that real estate is too risky for your goals, it may be that real estate is the ideal avenue, but keeep in mind that goals change so it's okay to try a few things.

Diana Khan · Answer

@Halenah Eva, I tend to look at one thing before getting too attached to any of the numbers: can the property actually be used the way the deal assumes?

I’ve worked with buyers where the cash flow looked great because the numbers assumed a certain rent, number of units, or rental use, and then the documents told a different story. I like to check the leases, legal unit count, zoning, title, HOA restrictions if there are any, and anything else that could change how the property can be rented. A spreadsheet can make almost any deal look good if one of the assumptions is wrong.

I’d be glad to stay connected, @Halenah Eva. For me, the numbers tell you whether a property is worth a closer look, but the due diligence tells you whether those numbers are actually real.

Adam Bartomeo · Answer

The PURCHASE PRICE is always the most crucial number. If you buy right than you can go over budget on the rehab or charge lower rents and still have a great investment.

I recently bought a house for $40k. Even if I had to tear down the house I still bought it below land value, I will always make money.

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’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?

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.

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?

Joe Pryor · Answer

It depends on the Market. Currently Oklahoma City is 35% below the national median price of a home which means a new construction turnkey rental is positive as low as $210,000. What I believe is my prime number is internal rate of return, IRR. Rather than a one year analysis it is a look at a return over a longer period of time like 7 to 10 years, and it gives you a number that is annualized. It needs to be a "kitchen sink" analysis which should include expected vacancy, maintenance, and property manage fees. We do this on all property recommendations.

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?

What Number Do You Trust Most When Evaluating a Rental?

12 Replies