By Tyler Barry, Acquisitions Analyst
Underwriting rental properties has changed.
Higher interest rates, rising operating costs, and tighter margins mean assumptions that worked a few years ago no longer hold up today. Deals need to be evaluated more carefully, with less room for error and far more focus on downside protection.
Here’s how I underwrite rental properties right now and what I look for before recommending a deal.
The First Numbers I Look At When Underwriting Rental Properties
1. Realistic Market Rents
Rent assumptions drive everything, so this is always my starting point.
I establish market rent using real, closed rental listings, not asking rents. I also factor in days on market, concessions or incentives, and seasonal leasing patterns. If a property only achieves projected rent under ideal conditions, that number isn’t usable for underwriting.
2. Property Taxes
Taxes are pulled directly from the taxing authority, not estimates.
I also adjust for the difference between homestead and non-homestead tax rates. This is an area where many investors underestimate expenses, especially when evaluating properties that are currently owner-occupied.
What Immediately Kills a Rental Property Deal
For long-term rentals, we will not pursue deals where market rent is 0.5% of the purchase price or less, regardless of market.
At today’s interest rates, that threshold rarely leaves enough margin to absorb vacancy, repairs, capital expenditures, or operational surprises. If a deal can’t clear this baseline, it’s usually not worth spending more time on.
Common Rental Property Underwriting Assumptions Investors Get Wrong
Most investors understand rent and vacancy risk. Where I consistently see mistakes, even among experienced investors, is in maintenance, repair, and capital expenditure assumptions.
The Real Cost of Rental Property Maintenance and CapEx
To illustrate this, here’s a breakdown of expected monthly reserve costs for a modest $250,000, 1,200-square-foot home in a medium cost-of-living area. These estimates reflect rental use, which typically shortens system life compared to owner-occupied homes.
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Shingle Roof: $10,000 over 20 years → ~$42/month
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HVAC: $8,000 over 15 years → ~$44/month
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Water Heater: $1,500 over 10 years → ~$13/month
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Windows: $12,000 over 25 years → ~$40/month
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Appliances: $5,000 over 10 years → ~$42/month
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Paint: $3,500 over 3 years → ~$97/month
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Flooring: $5,000 over 5 years → ~$83/month
Before accounting for tenant damage, plumbing, electrical, exterior maintenance, or kitchen and bath updates, we are already well beyond the traditional assumption of 1% of purchase price per year in maintenance. That rule of thumb no longer holds up for most rental properties.
How Conservative We Are on Rent, Expenses, and Vacancy
We are conservative on all three.
If a deal only works by assuming aggressive rent growth, minimal vacancy, or unrealistically low maintenance, it’s not a deal worth doing. Underwriting should protect you on the downside, not rely on best-case scenarios.
One Thing Investors Often Miss When Underwriting Rental Deals
Thin cash flow at acquisition isn’t always a deal killer.
Debt service is fixed, while rents tend to rise over time. In some cases, debt service can even decrease through future refinancing. This is why it’s critical to model rental deals over a longer time horizon rather than focusing solely on year-one performance.
If you purchased a home 20 years ago that broke even each month at the time, it would likely be producing significant cash flow today. Rents in many markets have more than doubled, while the original debt payment has not.
Bottom Line
Higher interest rates have raised the bar for rental investing, but they haven’t eliminated opportunity.
The deals that still perform are built on realistic assumptions, conservative underwriting, and long-term stability. Underwriting discipline matters more now than it has in years.
If the numbers only work on paper, they don’t work.
Want Help Evaluating a Rental Deal?
If you’re reviewing a rental property and want a second set of eyes on the numbers, we’re happy to help.
Use the form below to get in touch and select the option that best matches what you’re exploring. Our team will follow up to talk through next steps and how we can help evaluate opportunities using today’s underwriting standards.
No pressure. Just a practical conversation about the numbers
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