The biggest mistake I see new investors make isn't picking a bad property, it's not running the numbers at all before falling in love with one. Here's the simple framework I walk clients through before any investment offer.
Start With Gross Rental Income
What can this property realistically rent for? Not the optimistic number you hope for, the number backed by actual comparable rentals in the area. This is a step people skip constantly, and it's the foundation everything else is built on.
Subtract the Real Expenses
- Mortgage principal and interest
- Property taxes and insurance
- Property management, if you're not self-managing (typically 8-10% of rent)
- Maintenance and repairs (budget roughly 1% of the property value annually)
- Vacancy (budget for at least a few weeks of vacancy a year, even in a strong market)
- HOA dues, if applicable
Whatever's left after all of that is your actual monthly cash flow, not the number you started with.
Know Your Cash-on-Cash Return
Take your annual cash flow and divide it by the total cash you put into the deal, down payment, closing costs, and any upfront repairs. That percentage tells you how hard your actual invested dollars are working, which matters more than the property's price tag alone.
Don't Ignore Appreciation and Equity
Cash flow isn't the only return. Paying down the mortgage builds equity every month, and property appreciation adds on top of that. A property with modest cash flow but strong appreciation potential can still be a great long-term investment, the key is knowing which type of return you're optimizing for.
The Framework in Practice
Before I help a client make an offer on an investment property, we run these numbers together using real, local comps, not assumptions. It's the difference between an investment that actually works and one that just looks good on paper.