# How do I evaluate a potential investment in rental property?

I am looking to buy a long-term rental property. My objective is to maximize cash-flow.

At this point I have a few figures, but I have no context to measure the numbers against:

For example - This property has a 46.58% Expense & Vacancy as a % of Gross Rental Income - which means that from a potential monthly rental income of \$1100, I will get \$587.62. Is that a good ratio, based on other investors?

Another one is at this point this house will get me a yearly return on investment of 8.78% (basically total cash in (down payment + repairs) by net cash flow). Is 8.78% a good number or not?

Should I consider equity appreciation since my goal is cash-flow? I don't really care about these numbers.

How do other investor measure their leads?

First - the \$600 (sorry, 587.62? Really?) you net from the \$1100 rent might be good or it might not. What is your investment/down payment?

Real estate has some funny math. First, you are required to depreciate the house (but not land) over 27.5 years. This creates an odd paper positive cash addition that isn't free and clear. On the other hand, when you see your principal drop say \$500/mo on your mortgage, it's not 'cash flow' but it's a positive number to your bottom line/net worth each month.

In theory, say you start with a break-even deal. The potential gain in value from inflation, plus rent inflation, plus the principal getting paid down, all add to a long term good deal. A positive cash flow to fund repairs and vacancy is all the better.

I don't know where that percent came from, but if you had a downpayment of \$80K, producing \$7200/yr that would be 8.78%.

If you offer the missing numbers, I'd be happy to update my answer.

• Your assumptions are correct - \$80K cash investment producing 6,900 Net income per year. No mortgage, and repairs are included in the \$80K.
– Geo
Aug 6, 2013 at 19:01
• I'd take such a deal in a New York minute. The net is great from day one even allowing for repairs. And not counting on growth. I wish you increased value and rising rent. But till that comes, enjoy your 9%. Aug 6, 2013 at 20:35
• @JoeTaxpayer Just so I'm clear, the 9% isn't guaranteed because rents could fall and/or tenants could move out, thus lowering the cash flow, right? Aug 7, 2013 at 18:24
• @JohnBensin the implication is that vacancy is built in to the numbers. I agree, however, repairs can be higher than forecast and a longer than normal vacancy between tenants. Rent dropping is a possibility, but only geo knows his area and market. Aug 8, 2013 at 3:20