Rental property analysis is an integral part of any potential deal because it shows the potential profitability and risk for different properties. It’s the process of examining a potential real estate deal through a variety of metrics, most notably cash flow and NOI, before making an offer on a property. It helps you understand the current or future state of a rental property — its strengths, weaknesses, and financial potential — so you can make a well-informed decision about how to best leverage it.

As part of analyzing a rental property, you may wish to also conduct a comparative market analysis. This can help you determine the fair market value of rental properties by comparing recent sales, active listings, and unsold properties. However, here we focus solely on the metrics you can glean and cash flow analysis from one property in question.

Two of the most important aspects of rental property analysis are cash flow and net operating income (NOI). Each are core calculations for every investor to know because they serve as a method of calculating your potential monthly income from a property. Calculating your potential income before even purchasing a rental property sets you and your business up for success.

Cash flow is a metric of how much money your properties are earning (the gross monthly rent collected) versus how much of that money you spend on maintaining them each month. This calculation is similar to NOI but focuses on whether the flow of cash into your account is positive or negative. In other words, it measures whether you’re making or losing money on an investment. Accurately estimating effective gross rental income is crucial in calculating net annual cash flow, as it directly affects the overall income when subtracting expenses to assess a property’s profitability.

Net operating income (NOI), on the other hand, measures the revenue earned from a property after operating expenses like maintenance, utilities, taxes, and insurance. By subtracting these daily expenses from the gross annual rental income generated by a property, you can get a clear picture of a property’s monthly earnings.

Note: It’s crucial to conservatively determine market rents during the initial analysis of rental properties with both the above metrics. While anticipating high rental income may be tempting, projecting more realistic estimates and exploring various scenarios based on these figures is advisable.

Cash flow and NOI are simple, quick, and effective methods of measuring whether a potential property is a good investment for your business. They go hand in hand with other metrics like cap rate and cash-on-cash return to provide an overview of your potential profitability on a property.

So, you know what rental property analysis is, but why does it matter?

The real estate market is always fluctuating, so you must be meticulous and pay close attention to detail when deciding whether a property will be a successful addition to your portfolio. Seasoned and new investors alike can find themselves in the middle of a bad deal if they skip the math. Why do the guesswork on a rental property if you can find its pros, cons, and financial potential before you even get to a closing?

Rental property analysis can also help you learn more about yourself as an investor. What criteria matter to you? What are your target goals financially? What types of deals would meet your expectations? Practicing deal analysis can help you answer these questions and look over deals faster and more accurately.

After all, this investment isn’t for your own living space — it’s a form of income. If an asset is more of an expense and labor than a source of revenue, it may not be the best deal for you and your personal goals. Rental property analysis walks you through a deal’s profitability and risks so you know before you buy.

There are many ways to approach property analysis, and the “right” way depends on your specific goals and criteria for a new rental property. Generally, it will involve calculating important metrics like cash-on-cash return, cap rate, NOI, and ROI, as well as evaluating the overall strength of a deal based on the state of the current housing market and monthly rent trends. It takes research and skill to analyze deals by hand, so rental property analysis calculators are an alternative for these steps.

Mortgage debt service plays a crucial role in your investment’s success but is not always factored into the above metrics. Cap rate, for instance, uses your property’s net operating income, which is calculated before accounting for mortgage debt service. It’s important to factor mortgage payments into your analysis when evaluating the income-generating capability of a property relative to its value.

Analyzing rental property deals may seem daunting, especially if calculating metrics isn’t your strong suit. We get it — organizing and reviewing that many numbers can be overwhelming! That’s why a rental property analysis spreadsheet that does the work for you can be a great tool for accurately assessing property cash flow. A property investment analysis spreadsheet simplifies complex calculations related to rental property finances, saving time and effort for investors.

Innago’s rental property analysis spreadsheet calculates key metrics for a rental property, like cash flow and NOI, and measures whether the property’s potential income meets your target numbers. It also adds together totals for income, expenses (like maintenance, property management fees, etc.), and loan payments. It’s designed to help you easily make choices about deals based on the provided metrics, giving you confidence in accepting the right deals and walking from the wrong ones.

Rental property analysis can help you become a more experienced real estate investor, and with practice, you can quickly and effectively assess whether a real estate deal meets your personal criteria for your business. A bad deal is much harder to get out of than to get into, so it’s important to prepare and educate yourself on rental property deals. That way, you can easily expand your portfolio with successful, profitable properties. Download our spreadsheet for rental property analysis today to get started.