You don't need a spreadsheet with 47 tabs. Three numbers, two ratios, and a short list of red flags will tell you whether a property is worth a deeper look -- or a pass.
The Three Numbers You Need
Every property evaluation starts with three numbers: purchase price, monthly market rent (not asking rent), and annual operating expenses (taxes, insurance, management, maintenance, vacancy).
Ratio 1: Cap Rate
Formula: NOI / Purchase Price
A "good" cap rate is 5-8%. Cap rate alone doesn't tell the whole story -- it ignores financing. But it's the fastest signal of whether a property's income justifies its price.
Ratio 2: Cash-on-Cash Return
Formula: Annual cash flow / Total cash invested
This factors in leverage (cap rate doesn't). Realistic expectations in the current rate environment: 6-10% cash-on-cash. How financing terms change the math is the key difference from cap rate.
The Red Flag Checklist
A 5-minute scan for deal-breakers:
- Deferred maintenance indicators (roof age, HVAC age, foundation issues)
- Neighborhood signals (vacancy rates, crime trends, school ratings)
- Rent-to-price ratio below 0.6% -- usually a pass
- Property tax surprises (check recent reassessments)
- HOA or special assessments
The Quick Decision Framework
- Green light: Cap rate > 6%, cash-on-cash > 7%, no red flags
- Yellow light: One metric is borderline -- dig deeper
- Red light: Multiple red flags or negative cash flow -- pass
Common Evaluation Mistakes
- Using asking rent instead of market rent
- Ignoring vacancy reserves (use 5-8% in stable markets)
- Forgetting property management costs (even if self-managing at first)
- Confusing gross yield with net yield
The 15-minute framework saves time and prevents bad deals. Run the numbers, check the red flags, and move on quickly if it doesn't pencil.