How to Spot a Good Investment Property

A great rental doesn’t just look right—it numbers out. Here’s how to quickly separate true performers from money pits.

1) Start With Demand (Location First)

• Renters nearby: Close to job hubs, hospitals/universities, bases, transit.

• Everyday needs: Grocery, gyms, parks within a short drive/walk.

• Renter profile match: Beds/baths, parking, pet policies that fit local demand.

• Regulations: Check local rules on short-term rentals, rent control, occupancy, permits.

2) Run the Core Numbers

Key formulas you’ll actually use:

• NOI (Net Operating Income) = Annual Rent – Operating Expenses (excludes mortgage).

• Cap Rate = NOI ÷ Purchase Price.

• Cash-on-Cash Return = (Annual Cash Flow after debt) ÷ Cash Invested.

• DSCR (Debt Service Coverage Ratio) = NOI ÷ Annual Debt Service (aim ≥ 1.20).

Quick screen tips

• Aim for a cap rate that beats safe alternatives in your market (often 6–8% for long-term rentals, market dependent).

• Cash-on-cash: Many investors target 8–12%; tight markets may run lower—just know your hurdle.

• Vacancy & PM: Use at least 5% vacancy and 8–10% management even if you plan to self-manage.

3) Example Deal Math (30 seconds)

• Price: $300,000 | Monthly Rent: $2,700

• Annual Rent: $32,400

• Expenses (est.): taxes $4,000, insurance $1,500, maintenance 6% ($1,944), PM 8% ($2,592), vacancy 5% ($1,620) → $11,656

• NOI: $32,400 – $11,656 = $20,744

• Cap Rate: $20,744 ÷ $300,000 = 6.9%

• Financing (25% down, loan $225,000 @ ~7%): P&I ≈ $1,497/mo → $17,964/yr

• Cash Flow: $20,744 – $17,964 = $2,780/yr

• Cash invested (down $75k + ~3% closing $9k + reserves $5k ≈ $89k)

• Cash-on-Cash: $2,780 ÷ $89,000 ≈ 3.1% (value-add or better price could improve this)

4) Check the Rent—Not the Listing Hype

• Pull true rent comps (same beds/baths, condition, parking, pets).

• Verify days on market for rentals and any concessions (free month, reduced deposit).

• Stress-test at 5–10% below pro forma rent to see if it still works.

5) Audit Expenses (where deals die)

• Taxes: Confirm the post-sale reassessment amount.

• Insurance: Get a quote (wind/flood/fire risks can spike premiums).

• Utilities: Who pays what? Water/sewer/trash can swing NOI.

• HOA/condo fees and upcoming assessments.

• Maintenance/CapEx: Roof, HVAC, plumbing, electrical, parking lot—age and replacement timelines.

6) Look for Clear Value-Add Paths

• Cosmetic upgrades to lift rent (LVP flooring, lighting, hardware, paint).

• Utility bill-backs (where allowed).

• Add in-unit laundry, storage, or parking monetization.

• Convert underused space (bonus bedroom, ADU, shed → office).

• Pet rent, smart-home features, furnished premiums for mid-term rentals (check local rules).

7) Financing Fit

• Compare fixed vs. ARM, points, and lender fees.

• Ask lenders about DSCR loans for investment properties.

• Model rate +1–2% to see if your deal still holds.

8) Red Flags

• “Pro forma” rent far above comps.

• Deferred CapEx (old roof/HVAC/electrical) with thin cap rate.

• Insurance/flood zone surprises.

• Seller unwilling to share utility/tax histories or lease docs.

• HOA litigation or low reserves.

9) Due Diligence Checklist (save this)

• Rent roll, estoppel letters, and actual 12–24 mo. income/expense statements.

• Last 2 years tax bills and insurance declarations.

• Full inspection + sewer scope + roof evaluation; quotes in hand.

• Permit history & zoning compliance; short-term rental or occupancy rules.

• Appraisal + lender underwriting early to avoid closing crunch.

Quick 5-Minute Screening

1. Verify rent with 3–5 comps.

2. Plug taxes/insurance/PM/vacancy/maintenance → NOI, Cap, DSCR.

3. Add financing → cash flow & cash-on-cash.

4. Stress-test (–5% rent, +10% expenses, +1% rate).

5. Only then schedule a showing.