The No-Fluff Formula for Evaluating Investment Property ROI
By Marjorie Pellegrini, Broker/Owner – Go North Realty
Before you fall head over heels for that charming duplex or can’t-miss cabin deal, pause for just a moment and ask the one question that separates successful investors from overwhelmed property owners:
Will it pencil?
In other words—do the numbers actually work?
Because if they don’t, it doesn’t matter how cozy the kitchen feels, how “cute” the neighborhood is, or what the seller says about “rental potential.” If the numbers fall apart under pressure, so will your returns.
This is the post to bookmark, share, and revisit before every deal. It’s the no-fluff, investor-first formula to help you break down ROI, avoid common traps, and walk into every purchase like a pro—with confidence, clarity, and a calculator.
Let’s break it down into the three pillars of smart real estate investing:
✔️ Cash Flow – What’s left after all the bills are paid
✔️ Cap Rate – Is the return worth the price?
✔️ Hidden Costs – The “gotchas” that kill good deals
This is how you protect your future, your finances, and your time—before you sign on the dotted line.
Know Your Cash Flow
If you’re a buy-and-hold investor, cash flow isn’t just a bonus—it’s your lifeline.
Cash flow is the money left over each month after you’ve paid:
- Mortgage
- Property taxes
- Insurance
- Maintenance
- Property management
- Vacancy reserves
- And any other recurring expenses
It’s your income. Your margin. Your buffer.
Cash Flow = Gross Rent – Operating Expenses – Mortgage Payment
Let’s look at an example:
- Rent: $2,000/month = $24,000/year
- Expenses: $800/month = $9,600/year
- Mortgage: $1,000/month = $12,000/year
- Cash Flow = $2,000 – $800 – $1,000 = $200/month
That $200 per month? That’s your breathing room. And if you don’t have it, you’re one leaky water heater away from regret.
Aim for $200–$400/month in positive cash flow per unit. Less than that? The deal needs to be airtight in every other category—or renegotiated.
Check the Cap Rate
Cash flow tells you what you’re pocketing. Cap rate tells you whether the property is a good investment in the first place—especially when comparing properties.
Cap Rate is short for capitalization rate. It measures your return if you paid all cash for the property. And while you might be financing your deal, this metric helps you gauge whether you’re overpaying for the income you’re getting.
Cap Rate = Net Operating Income ÷ Purchase Price
(NOI = Gross Rent – Operating Expenses)
Example:
- Rent: $2,400/month = $28,800/year
- Expenses: $10,000/year
- NOI = $18,800
- Purchase Price = $300,000
- Cap Rate = $18,800 ÷ $300,000 = 6.27%
Is 6.27% good? That depends on your market. In some areas, that’s strong. In others, that’s below average. The key is comparing it to other properties in your area, and to your personal investment goals.
Cap rate helps you filter out overpriced properties that don’t justify their income—and helps you spot underpriced gems before someone else does.
Don’t Get Sucker-Punched by Hidden Costs
This is where solid deals go to die.
You’ve penciled out great cash flow. You’ve confirmed a solid cap rate. But then—BAM. Out of nowhere come the “hidden” costs that no one talked about.
Let’s go through the biggest silent deal killers:
Maintenance & Repairs
Even with newer properties, maintenance is inevitable.
Older properties? Budget even more.
Plan to set aside 5–10% of your gross monthly rent for ongoing repairs. That’s not just for the leaky faucet—it’s for the future roof, the HVAC tune-up, and replacing broken appliances at the worst possible time.
Capital Expenditures (CapEx)
These are the big ones. Think roofs, siding, plumbing, furnaces, water heaters, windows. You can’t predict exactly when they’ll hit, but you know they will.
Smart investors set aside an extra 5–10% of rent for CapEx. That way, you’re not caught off guard by a $10,000 surprise.
Vacancy & Turnover Costs
Even the best tenants move. And when they do, it’s not just a loss of rent—it’s:
- Deep cleaning
- Repairs and paint
- Marketing the unit
- Screening new tenants
- Lease-up fees (if you use a property manager)
Assume 1 month of vacancy per year, at a minimum. That’s 8% of your annual income—gone. And that’s in a healthy rental market.
Property Management
Managing your own rental sounds good—until it doesn’t.
Even if you’re a DIY landlord today, plan for property management tomorrow. Whether it’s your fifth property, a move out of state, or just burnout, budget for 8–10% of monthly rent for management.
Having it built in protects your ROI and your sanity.
Penciling in Action: A Real-World Example
Let’s look at two similar deals and how penciling them out reveals their true colors.
Property A – Looks like a winner
- Purchase Price: $250,000
- Rent: $2,000/month
- Expenses: $750/month
- Mortgage: $1,150/month
- Cash Flow = $100/month
- Cap Rate = 6%
But here’s what’s not in the numbers:
- Roof needs replacement within 2 years
- Insurance quote is higher due to wildfire zone
- HOA dues of $175/month
- Tenant lease is below market, no increase allowed until renewal
After adjusting for those? It doesn’t pencil.
Property B – Looked average, but pencils beautifully
- Purchase Price: $225,000
- Rent: $1,850/month
- Expenses: $600/month
- Mortgage: $1,000/month
- Cash Flow = $250/month
- Cap Rate = 7.2%
No HOA, newer systems, and the tenant pays all utilities. It pencils—and then some.
This is why running the real numbers before you make an offer matters. It’s your first line of defense against bad investments.
The “Will It Pencil?” Checklist
Use this every time you analyze a deal:
Income
- Verified rent comps (not seller estimates)
- Vacancy reserve (5–8%)
Expenses
- Property taxes confirmed
- Insurance quote in hand
- Maintenance & CapEx set aside (10–20% total)
- Property management fees included
- HOA, utilities, and extras accounted for
Financing
- Accurate mortgage estimate (with your lender’s terms)
- Down payment and closing costs ready
Metrics
- Cash flow is positive ($200+/mo recommended)
- Cap rate is in line with your market and goals
- Property passes your “sleep test” (you’re not stressed just thinking about it)
Final Thoughts: Good Investing Is Boring—and That’s a Good Thing
You don’t need to hit a home run with every deal. You just need to avoid the ones that drain your energy, your time, and your bank account.
And how do you do that?
You pencil it out. Every single time.
No emotion. No guessing. Just math.
When you master this formula, you stop being a hopeful buyer—and become a strategic investor. You’ll move with confidence. You’ll negotiate with clarity. And you’ll build a portfolio that performs, year after year.
Bookmark this post. Save the checklist. Share it with a friend.
And if you’re serious about evaluating your next deal—don’t go it alone.
📩 Subscribe now to get the next article in the “Will It Pencil?” series—because we’re just getting started.
The next post covers how to run numbers on your very first rental, even if you’ve never analyzed a property before. You won’t want to miss it.
And if you’re ready to walk through a deal together?
👉 Let’s pencil it out. Check us out at GoNorthRealty.com and reach out to get started!
Marjorie's Real Estate Confessions... Spilling the (Real Estate) tea, one confession at a time! 
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