How to Analyze a Rental Property Before You Make an Offer

A complete rental property analysis on one $340,000 house: rent, vacancy, the full expense stack, NOI, debt service and every return metric, math shown.

To analyze a rental property, you build one number stack in one fixed order: market rent, minus vacancy, minus every operating expense including the two most people leave out, which gives NOI — and only then do you subtract debt service and calculate returns. The order is not stylistic. Run it out of order and you will justify a price instead of testing one.

Most rental property analysis stops at five metrics and never connects them to a decision. This walks one property from listing to go/no-go, with every line of arithmetic on the page:

Total cash invested is $68,000 + $6,800 = $74,800. That figure matters later; it is the denominator of your cash-on-cash return, and it is not the same as your down payment.

Step 1: Get the rent right, because the listing's rent claim is a marketing number

The seller's pro forma rent is the highest number the seller could defend, not the number a tenant will sign. Every metric downstream inherits this input, so an inflated rent does not produce a slightly wrong answer — it produces a wrong decision with confident-looking math behind it.

Verify it three ways:

• Active listings within a mile, same bed and bath count, same era of construction. These tell you the asking market.
• Leases actually signed in the last 90 days. These tell you the clearing market, which is the only one that pays you.
• The current lease, if tenanted. Ask for the lease and twelve months of rent roll. A tenant paying $2,350 for eighteen months with no late notices is worth more than a pro forma.

If in-place rent is below market, do not just plug in market rent. Use in-place rent for the months remaining on the lease and market rent after, and treat the gap as a repositioning assumption you have to execute. Here, signed comparables support $2,350/mo. Annual gross scheduled rent is $2,350 x 12 = $28,200.

Step 2: Subtract a real vacancy allowance to get effective gross rent

Gross scheduled rent assumes 365 paid days a year. That has never happened. Between turns, make-ready time and the occasional non-payer, a share of scheduled rent never arrives, and it belongs at the top of the stack — not as a vague mental discount at the bottom.

The US rental vacancy rate was 7.3% in Q2 2026 (FRED, RRVRUSQ156N). Your submarket will differ, but it is a defensible starting point and far above the 0% most sellers' spreadsheets assume. CasaWise estimates vacancy city-by-city from the address and falls back to roughly 8% with no local read — see how the model is built.

Gross scheduled rent   $2,350 x 12        = $28,200
Vacancy allowance      $28,200 x 7.3%     = -$2,059
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Effective gross rent                      = $26,141

Effective gross rent — $26,141 — is the only revenue figure that belongs in the rest of the analysis.

Step 3: Build the expense stack line by line, including the two lines amateurs omit

Percentage rules of thumb are where analysis goes to die. Build the stack line by line, and include these two lines even when your gut says not to:

CapEx reserve. Roofs, HVAC systems, water heaters and flooring do not fail on a schedule that matches your ownership. They fail once, expensively. A property that cash flows $200/mo and needs a $14,000 roof in year six did not cash flow $200/mo — it cash flowed less, and you financed the difference with denial. CapEx is a real annual cost whether or not you spend it that year, which is why CasaWise gives it its own line and hits it with a heavier worst-case modifier than operating expenses. Sizing it: CapEx reserves: what you should actually set aside.

Property management, even if you self-manage. Self-managing does not make management free. It makes you the one being paid, and if you do not book the expense you cannot tell a property that produces a return from a job that produces a wage. Book it. The fee comes back to you as income — but the asset has to clear its own hurdle without your labor subsidizing it, and it has to still work when you move, get busy, or sell to a passive buyer.

The full stack, with fixed costs driven by purchase price and revenue-based costs driven by effective gross rent:

That is 38.2% of effective gross rent. If your stack lands materially below 35% on a single-family rental with no HOA, you left something out. Check again for tax reassessed at your purchase price rather than the seller's assessed value, insurance quoted as non-owner-occupied rather than a homeowner policy, lawn and snow service, pest control, and utilities that stay in your name between tenants.

Step 4: NOI is the property's number, not yours

Effective gross rent                 $26,141
Less operating expenses              -$9,975
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Net Operating Income (NOI)           $16,166

NOI excludes your mortgage on purpose, because NOI describes the asset and the mortgage describes you. Two buyers with different down payments and rates buy the identical building and get the identical NOI. That makes it the right basis for comparing properties — and the wrong basis for deciding whether you can afford this one.

Step 5: Subtract debt service at today's actual rate, not the rate you remember

The 30-year fixed average was 6.67% the week of 13 August 2026 (FRED, MORTGAGE30US). Investment financing typically prices above the owner-occupied average, so treat 6.67% as a floor, not a target. CasaWise pulls live rates from FRED rather than letting you anchor on a rate from two years ago.

Loan amount    = $340,000 - $68,000               = $272,000
Monthly rate   = 6.67% / 12                       = 0.5558%
Payment        = P x r x (1+r)^n / ((1+r)^n - 1)
               = $272,000 x 0.005558 x (1.005558)^360 / ((1.005558)^360 - 1)
               = $1,749.75 per month
Annual debt service = $1,749.75 x 12              = $20,997

NOI                                   $16,166
Less annual debt service             -$20,997
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Annual cash flow                      -$4,831   (-$403/mo)

The deal is dead here, at step five, before a single return metric has been calculated. That is why the order matters. Start with cap rate and rent ratio — both of which look survivable — and you spend an hour building a case for a property that loses $403 a month.

The reason generalizes. The mortgage constant is annual debt service divided by loan balance: $20,997 / $272,000 = 7.72%. The cap rate is 4.75%. When cap rate sits below the mortgage constant you have negative leverage — every borrowed dollar earns less in the building than it costs in interest, so borrowing more makes the return worse. At 80% LTV, cash flow crosses zero below 0.80 x 7.72% = 6.18%. At 4.75%, this property is not close.

Step 6: Now run the return metrics, and know what each one is and is not good for

Three things that table shows which a five-metric listicle will not.

Cap rate and rent ratio both pass while the deal fails. A 4.75% cap is soft but not alarming, and 0.69% is above the ~0.65% CasaWise treats as par. Neither knows your mortgage exists. The 1% rule that would reject this at 0.69% was a useful screen in the 2010s; today it is broken, which is why the rent ratio is graded on a curve and weighted at 5%.

GRM at 12.06 says "look closer," and nothing more. It ignores expenses entirely. Under 12 warrants deeper analysis. It sorts a list of forty addresses; it never decides one.

DSCR at 0.77 is a financing problem before it is an investment problem. Lenders typically require 1.20+, and a debt-service-coverage product will not underwrite this at all. A DSCR of 1.0 is break-even; below 1.0 the property loses money before any maintenance surprise. More on where each metric lies: cap rate vs cash-on-cash vs IRR.

What "good" means, with the thresholds published

CasaWise scores each metric on a 0–100 piecewise-linear curve and weights them:

Bands: 80–100 Strong, 50–79 Fair, 20–49 Caution, 0–19 High Risk.

These anchors are calibrated to roughly a 7% rate environment. That is a real caveat, not a disclaimer. A 6% cash-on-cash sits at the ceiling here, while the historical professional target has long been 8–12%+. Both are true: 8–12% is what money bought when money was cheaper, and the curve is calibrated to what is achievable at today's cost of debt. If rates fall materially these thresholds should tighten, and anyone still using them unchanged is grading on a curve that has moved.

Scored against those anchors, this property returns 0 on cash-on-cash (-6.46% is below the -5% floor) and 0 on DSCR (0.77 is below the 0.95 floor). Cap rate scores about 42, rent ratio about 57. Even if IRR scored a perfect 100 — it will not — the weighted composite could not exceed 47. Caution band at best, with a flawless appreciation story doing all the work. What a good rental deal actually looks like breaks the bands down further.

Step 7: Stress it, because the worst case is the decision

The base case tells you what happens if your assumptions hold. You do not get paid for being right on average; you get wiped out by being wrong once. CasaWise runs three scenarios, and the worst case applies vacancy x1.8, operating expenses x1.2 and CapEx x1.4 — CapEx carries the heavier modifier because big-ticket repairs blow past estimate far worse than operating costs do. On this property that means vacancy 13.14%, expenses up 20%, CapEx up 40%.

NOI drops $3,531 — 21.8% — from modifiers that are not catastrophic. No fire, no lawsuit, no eviction moratorium. A slower leasing season, an insurance renewal, one HVAC system. The bleed goes from $403 to $697 a month: $8,362 a year out of pocket to hold an asset that is not paying you. Run the worst case first and you will kill bad deals in ninety seconds. A property that survives its worst case is one you can hold through the period when holding is the whole strategy.

Step 8: The number that makes you walk

Walk when the base case is negative and the worst case is worse. That is this property. No financing structure, appreciation assumption or tax benefit fixes a $403 monthly deficit that becomes $697 under mild stress — you cannot eat appreciation, and cash flow is the only pillar of the four that is liquid. The four pillars explains why the other three cannot cover a cash shortfall.

Walk when any of these is true after honest inputs:

• Base-case cash flow is negative. Be extremely cautious about acquiring a property that loses money from day one. You are buying a monthly liability and calling it an investment.
• DSCR is below 1.20. Most lenders decline there. Below 1.00 the asset cannot service its own debt and every shortfall comes from your income. The result can be catastrophic — foreclosure is the tail outcome of an under-covered rental held through a vacancy.
• The worst case exceeds your liquid reserves. $8,362 a year is survivable for some balance sheets and fatal for others. Compare it to cash on hand, not to optimism.
• You had to change an input to make it work. If it only clears after you raise rent 8% or drop the CapEx reserve, you did not find a deal. You found a spreadsheet.

What would have to be true

Walking away is more useful when you know the price at which you would not. Hold rent at $2,350 and the same expense stack, then solve for price:

• Cash flow breaks even at about $277,500. NOI $17,135, debt service $17,137, DSCR 1.00, cap rate 6.18%. That is $62,500 below asking — 18.4% off.
• DSCR reaches 1.20 at about $239,000. NOI $17,731, debt service $14,760, cash flow +$2,972, cash-on-cash 5.65% on $52,580 invested.
• At the $340,000 asking price, the deal needs a 4.31% mortgage to break even — the payment would have to fall to $1,347/mo. That rate does not exist right now.

So the offer is $277,500 at absolute best, and a disciplined operator bids nearer $239,000 or moves on. Rental property due diligence is not a search for reasons to buy — it is a process that returns a price, and sometimes the price is "no." Run the sequence in this order on every property and it takes minutes instead of an evening. Every formula and threshold above is published on how CasaWise calculates.

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