Most rental analysis goes wrong in the same place: the listing hands you a clean pro forma, you nod at the cap rate printed on it, and you never check whether the rent is real or whether the expense lines add up. The math is rarely the hard part. The hard part is feeding the math honest inputs, in the right order, so that one wrong number does not quietly carry the whole deal. This page walks a single property from list price to an offer, and the work is mostly verification, not arithmetic.
The example is one hypothetical duplex. Say it is listed at $340,000, two units, each advertised at $1,500 a month, in a metro where property taxes run a little over 1% of value. I will not re-derive what NOI or cap rate mean here, because other pages own that ground and link below. The job on this page is the sequence: verify, screen, itemize, compute, stress-test, and back-solve. Run a deal through it once and the next one takes twenty minutes.
Step one: verify the rent before anything else
The advertised rent is a hope until you confirm it. On our duplex the listing claims $1,500 per unit, $3,000 a month, $36,000 a year. Before that number touches a single calculation, pull your own rent comps: three to five similar units in the same submarket, same bed and bath count, rented in the last six months, not asking prices on units still sitting vacant. If your comps say the realistic rent is $1,400, your gross is $33,600, and you have found $2,400 a year the seller invented.
If the building is occupied, the lease is your verification. Ask for the current leases, a rent ledger showing what tenants actually paid, and an estoppel certificate. A unit leased at $1,500 two years ago in a market that now rents at $1,400 is not a $1,500 unit; it is a $1,400 unit with a tenant who will leave or renegotiate. Use the lower of the lease and your comps. For this walkthrough, say the comps confirm $1,500, so gross scheduled rent holds at $36,000 a year.
Step two: run the fast screens to decide if it earns an hour
Two rules of thumb exist to keep you from underwriting every listing in town. The 1% rule asks whether monthly rent reaches 1% of price. At $3,000 a month against $340,000, this duplex sits at 0.88%, below 1% but well inside the band worth a real look. The 50% rule assumes operating expenses eat about half of gross rent, which would leave $18,000 of NOI before the loan. That is an estimate to confirm, not a number to offer on, but it tells you the deal is plausible.
Screens have one purpose: triage. A property at 0.5% with a 60% real expense load gets a polite pass and no spreadsheet. Our duplex clears the bar to graduate from a guess to an underwrite. Everything from here is replacing the rules of thumb with the property's own line items.
Step three: build the expenses line by line
This is where listings lie by omission. The seller's pro forma shows taxes and insurance and stops. A real expense stack on our duplex, with $36,000 of gross rent, looks closer to this:
- Property taxes: $3,600. Pull the actual bill from the county, not a percentage of the listing price. Taxes often reassess on sale, so check whether the bill jumps when ownership changes.
- Insurance: $1,800. Get a real quote on a landlord policy for this address, not the owner-occupied number the seller carries.
- Vacancy: $1,800. A 5% allowance on $36,000. Even a building that never sits empty deserves this line, because turnover between tenants is not free.
- Repairs and maintenance: $2,520. Roughly 7% of rent for ongoing fixes, separate from big-ticket replacements.
- Capital reserves: $1,800. 5% set aside for the roof, the furnace, and the water heater you will eventually replace. This is the line that decides whether a $9,000 furnace is an emergency or a withdrawal. See cash reserves per door for how to size it.
- Management: $0 here, but price it anyway. You plan to self-manage, so you keep the 8% to 10% a manager would charge. Underwrite the deal as if you paid it, around $2,880, so the property stands on its own if you ever step back. See the real math on that fee.
Add the operating lines you will actually face: $3,600 taxes, $1,800 insurance, $1,800 vacancy, $2,520 repairs, and $1,800 reserves, plus the $2,880 management you are pricing in, totals $14,400. That is 40% of gross rent, a touch under the 50% rule, which is normal for a newer building with low taxes and tracks why the screen is only a starting point. Mortgage principal and interest are not operating expenses and do not belong in this total; they come in at the cash-flow stage.
Keep capital reserves and ordinary repairs as separate lines even though both reduce your real return. They behave differently at tax time: a repair is deductible the year you pay it, while a replacement is a capital item recovered over years. Mixing them now makes the year-end split harder later.
Step four: compute the deal numbers
With verified rent and honest expenses, the headline numbers fall out. Gross rent of $36,000 minus $14,400 of operating expenses leaves NOI of $21,600. The numbers move depending on whether you read them on operating expenses alone or on cash flow after the loan, which is exactly the distinction NOI vs cash flow walks through, so treat NOI as the property's number before financing.
Cap rate is NOI divided by price: $21,600 on $340,000 is 6.4%, a fair yield before financing to compare against other listings. Then run the financed return. Say you put 25% down, $85,000, plus about $8,000 in closing costs, for $93,000 in. A $255,000 loan at current investor rates costs roughly $20,000 a year in principal and interest. NOI of $21,600 minus $20,000 of debt service leaves about $1,600 of annual cash flow, a cash-on-cash return near 1.7%. Walk the mechanics of that ratio in cash-on-cash return and run your own figures through the cash-on-cash calculator and the cap rate calculator.
Step five: stress-test the reserves and the seller's pro forma
A 1.7% cash-on-cash return means almost no margin, and that is the point of underwriting honestly rather than to the listing. Hold the deal up to two pressures. First, the reserve test: $1,600 of annual cash flow does not cover a $9,000 furnace, so this deal only works if you bring real cash reserves to the closing table, beyond the down payment. Second, the pro forma test. Compare your verified worksheet to the seller's, the discipline laid out in pro forma vs actuals. The gap between their cap rate and your 6.4% is the seller's optimism, priced in dollars.
Step six: back-solve the offer the deal can support
Analysis is not finished when you have the numbers; it is finished when you have a price. If your target is a 7.5% cap rate, divide your verified NOI by it: $21,600 divided by 0.075 is $288,000. That is the price at which this duplex hits your number, roughly $52,000 under the $340,000 ask. Whether you offer there, meet in the middle, or walk is a negotiation, but now the offer is anchored to a yield you chose rather than to the seller's sticker. This whole sequence is one deal inside the larger project of building a rental property portfolio and the broader first-purchase process.
From the deal you underwrote to the property you own
Every number on this page is a forecast, and a forecast is a guess until the property starts producing actual income and expenses. The gap between what you underwrote and what the building does is the most useful feedback a landlord gets, and the only way to see it is to track the real figures against your deal sheet. I built rents.ai because that loop kept breaking in my own spreadsheets, where last year's underwriting and this year's actuals lived in different files and never met. Its portfolio view shows your true NOI, cap rate, and cash-on-cash per property from the income and expenses you record, so you can see where your analysis was off. It will not pull rent comps or estimate market rent for you, though; market rent is a value you enter per unit, so the verification work on step one stays yours. A clean underwrite gets you to closing. Tracked actuals tell you whether your underwrite was honest.