Hey Lykkers! So you’re thinking about buying a rental property. The idea of “passive income” can sound tempting—but in reality, rental income only becomes dependable when the math works after every expense and every empty month.

The key isn’t just buying a house; it’s buying a small business with predictable cash flow. Here’s how experienced investors evaluate a rental, starting with the famous 1% rule—and then going beyond it with the numbers that actually decide whether a deal succeeds.

The 1% Rule: Your First Gut Check

The 1% rule is a fast screening method. It suggests that a rental’s monthly rent should be about 1% of the total all-in cost (purchase price plus needed repairs).

Example: You buy a property for $200,000. To pass the 1% rule, it must rent for at least $2,000 per month.

What it does: It’s a quick filter that helps you avoid spending hours on deals that are unlikely to cash flow.

What it doesn't do: It ignores the full expense picture, including vacancies, repairs, and long-term replacements. Treat it as a first glance, not a final answer.

The Main Course: Calculating True Cash Flow

This is where you build your pro forma—a fancy term for your property's projected profit and loss statement. Grab a spreadsheet.

The Simple Cash Flow Formula:

Monthly Cash Flow = Monthly Income - Monthly Expenses

Let's define those terms:

Monthly Income:

- Market Rent: Your primary income. Be realistic based on comparables.

- Other Income: Pet fees, laundry, storage.

Monthly Expenses (The Big Ones!):

- Mortgage (P&I): Principal and Interest.

- Property Taxes: Often 1-2% of property value annually.

- Insurance: Landlord policy.

- Vacancy: Reserve 5-10% of rent for when the unit is empty.

- Repairs & Maintenance: Reserve 5-10% for ongoing fixes (leaky faucets, appliance repair).

- Capital Expenditures (CapEx): The big-ticket savings account for roof, HVAC, siding replacement. This is what most beginners forget! Reserve 5-10%.

- Property Management: Even if you self-manage now, factor in 8-10% for if you ever hire out.

- Utilities: If you pay for any (water, trash, common area electric).

Example Math:

A $200,000 property with 20% down:

- Rent: $2,200

- Mortgage (principal + interest): ~$850

- Taxes/Insurance: ~$350

- Vacancy/Repairs/CapEx/Management Reserves: vacancy 6% + repairs 7% + CapEx 7% + management 8% = 28% of rent (~$616)

- Estimated Monthly Cash Flow: $2,200 − ($850 + $350 + $616) = ~$384

Important note on Net operating income (NOI): It is rent minus operating expenses (like taxes, insurance, maintenance, management, utilities), and it excludes debt service. Your cash flow after debt service comes after subtracting your monthly payment.

Beyond Monthly Cash Flow: The Core Return Drivers

Smart investors look at total return, not only the monthly leftover. Most rental returns generally come from a mix of:

1. Cash Flow: The monthly income we just calculated.

2. Appreciation: The long-term increase in the property's value.

3. Loan Paydown: Your tenant pays down your mortgage balance, building your equity.

4. Tax Advantages: Deductions for depreciation, interest, and expenses.

To keep your analysis grounded, it helps to remember this principle:

Frank Gallinelli, a real estate investment analyst and author, writes, “If you’re serious about evaluating income-producing real estate… you need to go deeper.”

Your Action Plan: The Analysis Checklist

1. Screen with the 1% Rule: Does it pass the sniff test?

2. Run Full Numbers: Plug all expenses into a spreadsheet. Use conservative estimates.

3. Calculate Key Metrics:

• Cash-on-Cash Return: (Annual Cash Flow / Total Cash Invested). Aim for 8-12%+ in most markets.

• Cap Rate: (Annual NOI / Purchase Price). A measure of unleveraged return, good for comparing properties.

4. Stress-Test Your Assumptions:

• What if rent is 10% lower?

• What if vacancy is higher than expected?

• What if a major replacement hits earlier than planned?

Bottom Line

Analyzing a rental is about removing emotion and trusting the math. The 1% rule is a quick scan, but your pro forma is the blueprint. A deal can look great on rent alone—and still disappoint once you account for true operating costs and long-term replacements.

Your goal isn’t just to buy property; it’s to buy a reliable, cash-flowing asset. Do the boring math upfront, and you’ll make decisions you can live with—month after month.