One of the most common mistakes I see new investors make is falling in love with a property before they’ve run the numbers. The house looks great, the neighborhood feels right, and they convince themselves the deal works. Sometimes it does. More often it doesn’t, and by the time they figure that out they’re already committed.
Here’s how I think about analyzing a deal — the metrics I actually use, explained in plain language.
Purchase Price and After Repair Value (ARV)
Everything starts here. The ARV is what the property will be worth after all repairs and improvements are complete. You figure this out by looking at comparable sales in the same neighborhood — similar size, condition, and age. Your purchase price needs to leave enough margin between what you pay and the ARV to cover your rehab costs, holding costs, and still generate a profit or a strong rental yield.
A rough rule of thumb many investors use is the 70% rule — don’t pay more than 70% of the ARV minus repair costs. It’s not perfect for every situation, but it keeps you disciplined.
Rehab Estimate
Get multiple contractor bids and add a contingency — I use at least 10 to 15 percent on top of whatever number I think is right. Rehab costs are the most unpredictable variable in any deal, especially in older housing stock. Budget conservatively and you’ll never be surprised.
Monthly Cash Flow
For rental properties, this is the number I care about most. Take your projected monthly rent, subtract your mortgage payment, taxes, insurance, property management fees if applicable, and a maintenance reserve. What’s left is your cash flow. If it’s negative or razor thin, the deal isn’t working hard enough for you.
Cash on Cash Return
This tells you how efficiently your invested capital is working. Divide your annual cash flow by the total cash you put into the deal. A solid cash on cash return in today’s market is generally considered 8 percent or better, though this varies by market and strategy.
Cap Rate
If you’re buying without financing or comparing multiple investment properties, the cap rate is useful. Divide the property’s annual net operating income by the purchase price. This gives you a clean apples-to-apples comparison across different properties regardless of financing structure.
The Bottom Line
None of these numbers tell the whole story on their own. A great deal is one where the purchase price, rehab costs, rental income, and exit strategy all align to produce a return that justifies the risk. Run your numbers conservatively, verify your assumptions, and never let emotion override the math.
If you’ve got a deal you want to run numbers on together, reach out. That’s one of my favorite things to do.