Rent is the easy half of a rental analysis because you can look it up. Expenses are scattered across a tax bill, an insurance quote, a management contract and a roof nobody has inspected. This guide goes through each line on one deal: a $240,000 rental that brings in $2,400 a month, bought with 25% down on a 30-year loan at 7%. All figures are pre-tax.
Start with the rent you will collect
Vacancy is not a bill, but it cuts income the same way. Investors commonly pencil in 5% to 10% of rent depending on the market. The example uses 5%.
$2,400 × 12 = $28,800 gross rent
$28,800 × 5% = $1,440 vacancy allowance
$28,800 minus $1,440 = $27,360 collected rent
That $27,360 is the effective gross income. The cushion is thin: one empty month costs $2,400, which is $960 more than the whole year's allowance. To replace the guess, ask local property managers how long comparable units sit between tenants.
Property taxes and insurance
These bills do not move with the rent, which is the first reason percentage rules break down.
- Property taxes: $2,900 a year. Do not copy the seller's bill. In many areas a sale can trigger a reassessment, and exemptions an owner-occupant receives often do not carry over to an investor. Rules vary by state and county, so ask the assessor's office how the bill could change after a sale at your price.
- Insurance: $1,400 a year. Get a landlord policy quote for the exact address before you commit. Premiums vary with location, roof age and claims history, and flood coverage is typically a separate policy.
Maintenance and capital expenditures
Maintenance is the small recurring work: a leaking faucet, paint between tenants. Capital expenditures are the large, infrequent replacements: roof, furnace, water heater, flooring. Investors commonly budget around 5% to 10% of rent for each. The example uses one combined line at 10% of gross rent.
$28,800 × 10% = $2,880 a year, or $240 a month
A percentage of rent is a weak way to size this line, because a roof costs about the same whether the house rents for a little or a lot. For a better estimate, list each major component, its replacement cost and the years it likely has left. Divide each cost by its remaining years and add the results. If that total alone comes close to $2,880, nothing is left for routine repairs and 10% is too low for this house.
Property management
The example budgets 8% of collected rent.
$27,360 × 8% = $2,188.80, rounded to $2,189
Managers of long-term rentals commonly charge around 8% to 12% of collected rent, and many add a leasing fee, a renewal fee or a markup on repairs. Ask for the full fee schedule. If you plan to self-manage, keep the line so the deal still works if you hire someone later.
HOA dues and utilities
The example budget has no line for either. If your property has them, every dollar comes out of cash flow. For an HOA, read the current dues, any pending special assessments and the rental rules. For utilities, find out which bills stay in the owner's name. Tenants in single-family houses often pay their own utilities, while owners of small multifamily buildings often cover water, sewer and trash. Ask the seller for twelve months of actual bills.
Add it up
$2,900 + $1,400 + $2,880 + $2,189 = $9,369 operating expenses a year
$27,360 minus $9,369 = $17,991 net operating income
That $17,991 is the NOI, a 7.5% cap rate on the $240,000 price. This example counts the CapEx allowance as an operating expense. Not every investor does, so check before you compare NOI figures. The mortgage is not an operating expense. After the $1,198 monthly mortgage payment, the calculator shows $302 a month of pre-tax cash flow, a 5.4% cash-on-cash return on the $67,200 of cash needed (25% down plus 3% closing costs), and a DSCR of 1.25.
Why the 50% rule is only a starting point
The 50% rule assumes about half the rent goes to operating expenses, and it is commonly taken to include vacancy. On $2,400 of rent that is $1,200 a month, or $14,400 a year. The itemized budget, counting vacancy, is smaller:
$1,440 + $9,369 = $10,809 a year
The rule is $3,591 a year more pessimistic. Apply it with this deal's $1,198 payment and you get $2,400 minus $1,200 minus $1,198 = $2 a month, where the itemized budget shows $302. The rule cannot see this property's tax bill or roof, and the itemized budget is only as good as the quotes behind it. Screen deals with the rule, then build the line items before you make an offer.
What could go wrong
- It takes only $302 a month of missed expenses to erase the cash flow. A reassessed tax bill or a higher insurance renewal could do it.
- Capital expenditures arrive in lumps. A $240 monthly allowance may not cover a failed furnace in the first year, so hold reserves beyond the $67,200 needed at purchase.
- Some lenders look for a DSCR around 1.20 to 1.25 or higher, and requirements vary by lender. At 1.25, this deal has little room for expenses to rise.
- This is a one-year snapshot. Taxes, insurance and repair costs tend to rise over time, and the analysis leaves out income taxes and depreciation.
Run your own numbers
Enter your quotes in the rental property calculator, compare the result with the 50% rule calculator, and read the glossary entry on operating expenses for what belongs in the total.