How to Analyze a Rental Property Before You Make an Offer

Most bad rental purchases I've seen over 31 years didn't fail because the buyer paid too much. They failed because the buyer analyzed the deal with rent and a mortgage payment, and nothing else. The rent showed up. So did the water bill, the vacancy in February, the boiler, and the tax bill that jumped after the sale.

In the video above I walk through the tool I built to speed this up. This article is the math behind it, so you can sanity check any deal yourself, whether it's a two-family in Lawrence, a condo in Lynnfield, or a beach place in Maine you're thinking of renting out part of the year.

The four numbers that actually matter

Investors throw a lot of terms around. Here's what each one tells you and where people get it wrong.

Net operating income never includes your mortgage payment. Cap rate is a property number, not a financing number. Two buyers can pay the same price for the same triple decker on Broadway in Haverhill and have wildly different cash-on-cash returns purely because one put 25% down and the other used a different structure.

The expenses people leave out

This is where deals get killed after closing. When I underwrite a property with a client, we budget for all of this:

• Vacancy. Even in a tight Merrimack Valley rental market, budget 5% to 8%. Turnover costs you a month of rent plus paint and cleaning.
• Maintenance and capital reserves. Two separate buckets. Maintenance is the leaking faucet. Capital is the roof, the boiler, the porch. On older New England housing stock, I'd set aside more than the internet's standard 1% of value per year.
• Water and sewer. On a lot of older multifamilies in Lawrence, Lynn, and Haverhill, the units aren't separately metered, so the owner pays. That's real money in cities with rising sewer rates.
• Insurance. A three-family costs more to insure than a single-family, and if any part of the property sits in a flood zone (parts of Lynn and coastal towns qualify), flood insurance is a separate policy on top.
• Property taxes after the sale. Don't use the seller's current bill blindly. Assessments move, and residential exemptions the seller had may not apply to you as a non-occupant.
• Snow, trash, landscaping, pest. Small line items that add up to a real number over twelve months.
• Lead paint. Massachusetts requires deleading for units built before 1978 when a child under six lives there. That can be a five-figure surprise. Check the current requirements on mass.gov before you write an offer on a pre-1978 multi.

That's roughly $1,520 a month gone before the first dollar of mortgage payment. If a listing shows $3,600 in gross rent and someone tells you the mortgage is $2,400, the deal is negative, not positive. This is the single most common error I see on投 investor spreadsheets.

Short-term versus long-term rental

Short-term can produce more gross revenue and almost always produces more expense and more risk. Furnishings, cleaning, utilities, higher insurance, platform fees, and far more management time. Occupancy is seasonal, so an annual average is more honest than a peak-season week.

Massachusetts registers short-term rentals with the Department of Revenue and applies a state room occupancy excise plus local option taxes, and some towns add a community impact fee. Individual cities and towns also set their own rules on whether short-term rentals are allowed at all. Before you underwrite a property on STR income, read the local ordinance for that specific city, not the state summary. Same goes for New Hampshire and Maine, where the rules vary town by town.

One more thing on financing: most lenders will not use projected short-term rental income to qualify you on a conventional loan. If the deal only works as an STR, the financing conversation changes, and you should have it before you're under agreement.

Taxes change the answer

Cash flow is pre-tax. Your actual return includes depreciation, which shelters a chunk of rental income on paper, and it includes deductible expenses like mortgage interest, insurance, and repairs. The IRS covers what counts as rental income and what you can deduct under rental income and expenses. Talk to your accountant before you buy, not in April. Two identical properties can produce very different after-tax outcomes depending on how you hold them and whether you're actively involved.

The offer-day version of this

When you're competing on a good multifamily in Methuen or Lynn, you don't have a week to build a model. What I want an investor to be able to answer in ten minutes:

1. What's realistic market rent for each unit, not the current below-market rent from a long-term tenant?
2. What's the annual operating expense number, including reserves?
3. What's the cash-on-cash return at the down payment I plan to use, and does it still work if rent comes in 10% lower?
4. What breaks the deal? Usually it's the roof, the heating systems, or a tenant you can't relocate.

If the answer to number three is thin at your assumed rent, walk. A deal that only works at perfect occupancy and zero repairs isn't a deal.

Where the lender fits

Every dollar of down payment changes cash-on-cash. Every point of expense changes DSCR. That's why I'd rather look at the numbers with a client before the offer than after the inspection. Sometimes the right move is a bigger down payment for the payment relief. Sometimes it's the opposite: less cash in, lower return per dollar, more properties. There's no universal right answer, and anyone who tells you otherwise is selling something. The CFPB has good neutral background on comparing mortgage offers at consumerfinance.gov.

Practical next steps

Pull the property's actual tax bill from the city assessor's site rather than relying on the listing sheet. Ask the listing agent for a rent roll, current leases, and twelve months of utility bills. Get an insurance quote before your contingency expires, since it's free and it's a real number. Then run the deal at three rent levels: what the seller claims, what market says, and market minus 10%.

If your agent has access to instant analysis on any MLS listing, use it. It won't replace the due diligence above, but it tells you in seconds whether a property deserves the two hours of due diligence in the first place.