So, you're thinking about buying a rental property. Maybe it’s the allure of passive income. Maybe it’s the dream of retiring early. Or maybe you just want a place where someone else pays the mortgage and you still get to call yourself a real estate mogul at cocktail parties. Respect.
But before you start buying every duplex with “potential” and a suspiciously low asking price, let’s talk about how to actually evaluate a rental property like a pro—no spreadsheets required (okay, maybe one spreadsheet).
1. Start With the 1% Rule (but Don’t Marry It)
The 1% rule says a property should rent for at least 1% of its purchase price per month. So if a home costs $300,000, you're looking for rents of $3,000/month.
This is a quick filter, not gospel. It works better in high-yield markets and less well in places where appreciation is a bigger play—like many neighborhoods around Atlanta. But if a property doesn’t even come close to 1%, it might not cash flow.
Pro Tip: If the rent is $1,500 and the house costs $450,000, that math ain’t mathin’.
2. Know Your Operating Expenses
Spoiler alert: You don’t get to keep all the rent. Bummer, I know.
You’ll need to account for:
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Taxes (property taxes aren’t sexy, but they’re real)
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Insurance
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Repairs and maintenance (Toilets break. Sometimes twice a year.)
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Property management fees (if you’re not into 2am “my A/C won’t turn on” calls)
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Vacancy (budget for at least one month per year)
A safe ballpark is to estimate 30-50% of your gross rent as expenses, depending on the property’s age and condition.
3. Do a Cash Flow Analysis
Here comes the spreadsheet part. But don't panic—we’re keeping it simple.
Here’s the formula:
Monthly Rent – Monthly Expenses (including mortgage) = Monthly Cash Flow
If the result is positive, you’re winning. If it’s negative… you’re either banking on appreciation or buying yourself a very expensive hobby.
Want a rule of thumb? Aim for at least $100–$300 per door, per month in net cash flow.
4. Don’t Forget About Cap Rate and ROI
If you want to get fancy (or just impress your accountant friends), calculate the Cap Rate:
Cap Rate = Net Operating Income ÷ Purchase Price
For example, a property generating $10,000/year in net operating income (NOI) that costs $200,000 has a cap rate of 5%. In Atlanta, 5–7% is typical in solid neighborhoods.
And if you’re leveraging financing, figure out your Cash-on-Cash Return—basically how much cash flow you’re getting on the cash you actually invested (down payment + closing costs + rehab).
5. Research the Area Like a Nosy Neighbor
Even the prettiest house won't perform well if it’s in the wrong zip code. Look for:
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School districts (even renters care)
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Employment hubs nearby
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Low crime rates
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Rising property values or signs of gentrification
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Rental comps—know what similar homes are actually renting for
Talk to other landlords, property managers, or anyone who’ll spill the tea on tenant quality, turnover rates, and rent trends.
6. Run a Worst-Case Scenario Test
Before you buy, ask yourself:
“What if rents drop 10%?”
“What if it sits vacant for 3 months?”
“What if the HVAC dies the day I close?”
Then check your numbers again. If the deal still works, or you can absorb the hit without losing sleep, you’ve got a solid candidate.
TL;DR (Because I Know You’re Busy)
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Use the 1% rule as a quick screen.
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Budget conservatively for operating expenses.
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Make sure your property cash flows, even if it’s just a little.
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Know your cap rate and ROI if you want to speak fluent investor.
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Choose the right location—it matters more than granite countertops.
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Stress test your numbers like you’re prepping for a financial hurricane.
Final Thought
You don’t need to be a spreadsheet ninja to evaluate a rental property, but you do need to run the numbers and do your homework. When in doubt, talk to someone who's been through it—or just text your friendly neighborhood Realtor (hi, that’s me).
Thinking of buying your first (or fifth) rental? Let’s run the numbers together—and avoid any “learning experiences” that come with five-figure repair bills.
