How to Analyze a Rental Property

Cash Flow, The Foundation of Every Rental Decision

Cash flow is the money left over after every expense is paid each month. It's the most important number in rental property analysis.

The formula:
Gross Monthly Rent − Mortgage Payment (PITI) − Property Management − Maintenance Reserve − Vacancy Reserve − Other expenses = Monthly Cash Flow

Expenses to never skip:

• Maintenance reserve: Budget 1% of the property value annually, divided by 12. $200,000 property = $2,000/year = $167/month
• Vacancy reserve: Budget 5–8% of monthly rent. $1,500/month rent × 8% = $120/month
• Property management: 8–12% of monthly rent if you use a PM company. $1,500/month × 10% = $150/month

Example, $220,000 property, $1,600/month rent, 20% down, 7% rate:

• Mortgage (PITI): ~$1,400/month
• Property management: $160/month
• Maintenance reserve: $183/month
• Vacancy reserve: $128/month
• Monthly cash flow: $1,600 − $1,871 = −$271/month (not a deal)

Adjust: Same property at $180,000 with $1,800/month rent → cash flow of $179/month (worth exploring). Target: $200+/month minimum. $500+/month is a strong deal.

The 1% Rule, Your Quick Filter

Before running full numbers on a property, use the 1% rule as a quick filter to decide if it's even worth your time.

The rule: Monthly rent should equal at least 1% of the purchase price.

• $150,000 property → needs $1,500/month rent
• $200,000 property → needs $2,000/month rent
• $250,000 property → needs $2,500/month rent

When browsing listings, check rent estimates against the purchase price. If it doesn't pass 1%, it probably won't cash flow, move on.

Adjusted benchmark for current markets: In the Florida Emerald Coast and Metro Atlanta, 0.7–0.8% is often the realistic target for a good deal. Below 0.6% is typically break-even or negative cash flow unless you're buying for appreciation.

Example, Navarre, FL: $280,000 home, rent $1,800/month. The 1% rule needs $2,800, fails. The 0.7% rule needs $1,960, close, worth analyzing fully.