Running the Numbers on a Rental Before You Bring In a Partner

Bringing a deal to a potential partner with sloppy numbers is the fastest way to lose credibility. The good news: rental underwriting is not complicated. It's a handful of numbers, and the discipline is in being honest about them.

The five numbers that matter

1. Gross rent. Not the listing agent's "market rent" estimate — actual comparable rents from currently leased units within a half-mile. Check three sources and take the conservative one.

2. Vacancy. Use 5–8% depending on the market, even if the unit has been occupied for years. One month empty every two years is 4.2% all by itself.

3. Operating expenses. Taxes, insurance, maintenance, management (even if you self-manage — your time isn't free at scale), utilities you cover, and reserves. A common rule of thumb is 35–45% of gross rent, but verify taxes from the actual assessor record, not the listing.

4. Net operating income. Effective rent minus operating expenses. This is the number everything else hangs on.

5. Cash-on-cash return. Annual pre-tax cash flow divided by the total cash invested (down payment, closing costs, rehab). This is the number your partner will compare against their alternatives.

Where beginners inflate returns

• Underestimating repairs. A 1970s house will cost more than 5% of rent to maintain. Budget capital expenditures separately from routine maintenance.
• Using the seller's expense figures. Sellers minimize expenses when marketing. Get real insurance quotes and actual tax bills.
• Ignoring management. Even self-managing partners should underwrite 8–10% for management. It keeps the deal honest and gives you room to hire help later.

What to show a potential partner

You don't need a fancy pitch deck. You need one page: the purchase price, the rent evidence, the expense breakdown, the financing terms, and the resulting cash-on-cash return — plus the assumptions behind each line. A partner who can see your assumptions can challenge them, and a deal that survives being challenged is the kind worth doing together.

If the deal only works at full occupancy with zero repairs and 2% rent growth every year, it doesn't work.