A Beginner’s Guide to Evaluating Rental Properties That Actually Make Money
By Marjorie Pellegrini, Broker/Owner – Go North Realty
Buying your first rental property is exciting—until you realize you’re about to invest thousands of dollars based on… what exactly? A gut feeling? A Zillow price? Someone’s estimate of what it might rent for?
No thanks! You need numbers. Real ones.
That’s why this post will walk you step-by-step through how to confidently evaluate a rental property—before you buy it.
We’ll cover:
- How to estimate rental income
- What expenses to include (hint: it’s more than taxes)
- Simple formulas to know if the deal pencils
- Rookie mistakes to avoid
- Real-life examples to guide your decision
By the end, you’ll be able to say: “This property earns ___% return—and here’s how I know.”
Let’s run the numbers like a pro.
Estimate Rental Income (Realistically)
Before anything else, you need to know what the property should rent for. That means market rent, not the current tenant’s under-market lease or a landlord’s wishful thinking.
How to find market rent:
- Check comps on Zillow, Apartments.com, or Facebook Marketplace (varies by location)
- Call local property managers and ask, “What would this rent for?”
- Look at price per square foot for nearby rentals
💡 Pro Tip: Assume you’ll have at least one vacant month per year.
If rent is $1,800/month, plan for $19,800/year, not $21,600. (This can vary)
Estimate All Operating Expenses
Don’t fall into the trap of only calculating mortgage + taxes. That’s not even half the picture.
Here’s what to include:
| Expense | % of Rent (Est.) | Notes |
| Property Taxes | Varies | Use real tax bill from assessor’s site |
| Insurance | ~4-6% | Higher in certain markets (e.g., coastal AK, or far from Fire Station) |
| Property Management | 8–10% | Even if you self-manage, your time has value |
| Repairs & Maintenance | 5–10% | Older properties need more |
| Vacancy | 5–8% | Built-in buffer for turnovers |
| Capital Expenditures (CapEx) | 5–10% | Big-ticket items: roof, HVAC, etc. |
| HOA (if any) | Fixed | Only if applicable |
| Utilities (if landlord-paid) | Varies | Include water, sewer, trash, if not tenant-paid |
💡 Use a spreadsheet or calculator to total up your Operating Expenses.
Calculate Net Operating Income (NOI)
Formula:
NOI = Gross Rental Income – Operating Expenses
This is your property’s income before the mortgage is paid.
Example:
- Gross Rent: $1,800/month = $21,600/year
- Operating Expenses: $9,000/year
- NOI = $12,600/year
That’s the base number you’ll use for calculating ROI metrics like cap rate.
Factor in Financing & Cash Flow
Now we account for your mortgage. Cash flow = what’s left for you each month.
Formula:
Cash Flow = NOI – Annual Debt Service
Debt service = your yearly principal + interest payments
Example:
- NOI = $12,600
- Mortgage = $1,050/month = $12,600/year
- Cash Flow = $0
That’s break-even. If expenses were slightly higher—or rent dropped—this property would be a loser.
💡 Ideally, look for $200–$400/month in positive cash flow per unit as a buffer against surprises.
Calculate Your Cash-on-Cash Return
This shows your return on the actual cash you’re putting into the deal.
Formula:
CoC Return = Annual Cash Flow ÷ Total Cash Invested
Total cash = down payment + closing costs + upfront repairs
Example:
- Down Payment: $45,000
- Closing Costs: $5,000
- Repairs: $10,000
- Total Cash: $60,000
- Annual Cash Flow: $3,000
- CoC Return = 5%
Is that good? That depends on your market and your goals. But now, you know exactly what you’re earning on your money.
Optional – Check the 1% and 50% Rules
These are investor shortcuts—not foolproof, but helpful as quick filters.
1% Rule:
Does monthly rent equal 1% of purchase price?
- $1,800 rent ÷ $180,000 purchase = ✅ 1%
50% Rule:
Assume 50% of rent goes to expenses.
- Rent: $1,800 → Expenses = $900
- If mortgage is <$900, you may have positive cash flow
These rules help eliminate obvious losers fast—but always run full numbers to confirm.
Common Rookie Mistakes
❌ Ignoring vacancy or CapEx
❌ Assuming appreciation instead of cash flow
❌ Underestimating repair costs
❌ Overestimating rent
❌ Not stress-testing numbers (e.g., what if rent drops $100?)
💡If the numbers only work under perfect conditions—it’s not a good deal.
Real-Life Example – Does It Pencil?
Let’s say you find a single-family home for $250,000.
- Estimated Rent: $2,000/month
- Taxes/Insurance/PM: $600/month
- CapEx/Repairs/Vacancy: $300/month
- Mortgage: $1,200/month
NOI = $2,000 – $900 = $1,100/month = $13,200/year
Annual Mortgage = $14,400 → Negative cash flow
But wait—if you can buy it for $220,000 or increase rent to $2,200—it pencils.
💡 Always test multiple scenarios.
Your first rental doesn’t have to be perfect. But it must make sense on paper. And that means knowing:
- What it will rent for
- What it will cost you to operate
- What you’ll earn based on your investment
Run the numbers. Run them again.
Because investing isn’t emotional—it’s mathematical.
And once you know how to pencil it out, you’re already ahead of 90% of new investors.
Need help running your first deal through the numbers? Let’s walk through it together. Click here to book a strategy call: [Go North Realty].
Next up in the series:
“The 1% Rule, the 50% Rule, and the 70% Rule—Which Actually Works in 2025?” — coming your way soon!