Investor Due Diligence
Jan 28, 2026
How to evaluate a rental property before you buy
Every number in your deal analysis depends on one input: rental income. Get that wrong and nothing else matters. Here is the complete due diligence checklist.
The process
The due diligence checklist
Six steps, in order. Skip one and you are guessing.
Location analysis
Market fundamentals. Job growth, population trends, rent trajectory.
Rental income projection
The number everything else depends on. Get this right first.
Expense estimation
Taxes, insurance, maintenance, vacancy, management, capex.
ROI calculation
Cap rate, cash-on-cash return, and debt service coverage.
Physical inspection
Roof, HVAC, foundation, plumbing, electrical. What will break.
Final decision
Does this deal meet your criteria? Make the offer or walk.
Location analysis
You cannot fix location. Everything else about a property can be changed. Location cannot. Start here.
Look at three things. Job growth: are employers moving in or leaving? A city adding 5,000 jobs per year absorbs rental supply. A city losing its largest employer does not. Population trend: growing populations push rents up. Shrinking populations create vacancy. Rent trajectory: have rents in this zip code increased or decreased over the last 3 years?
Then zoom in. Is the specific neighborhood improving or declining? New construction, business openings, and rising home values are positive signals. Boarded windows, vacant storefronts, and code violations are not.
Check the school district rating even if you are buying a studio apartment. School quality drives family demand, which drives single-family and multi-bedroom rents across the entire area.
Rental income projection
This is the number that drives your entire deal. Cap rate, cash-on-cash return, debt service coverage ratio. All of them start with rental income. If your rent number is wrong by $200/month, your annual NOI is off by $2,400, your cap rate is fiction, and your cash-on-cash return is a fantasy.
Seller proformas are fiction. Every seller proforma you will ever see shows the property performing better than it actually does. They inflate rents, understate expenses, and assume zero vacancy. The seller's job is to make you pay more. Your job is to find the real numbers.
You need comparable rental data from the actual market. Not what the seller says the unit will rent for. Not what you hope it rents for. What the market will actually pay for a property with these bedrooms, this square footage, these amenities, in this condition, at this location.
How a $350/mo rent gap kills a deal
A $250,000 property. The seller proforma says rent is $2,200/mo. You run comps through RentJudge and the actual market rent is $1,850/mo.
Seller's numbers
Gross rent: $2,200/mo ($26,400/yr)
Expenses (45%): $11,880/yr
NOI: $14,520/yr
Cap rate: 5.8%
Real numbers
Gross rent: $1,850/mo ($22,200/yr)
Expenses (45%): $9,990/yr
NOI: $12,210/yr
Cap rate: 4.9%
That $350/mo gap is $4,200/yr in gross income. The "5.8% cap rate deal" is actually a 4.9% deal. Add a mortgage payment and that seller proforma "cash flow" becomes negative cash flow. You are now paying money every month to own this property.
Get market rent in 2 minutes instead of 2 hours
RentJudge pulls comparable rentals near the subject property, adjusts each comp for differences in amenities, condition, size, and features using ML models, and gives you a data-backed rent estimate. Upload property photos and the Visual AI scores condition automatically.
You stop trusting seller proformas. You stop spending hours on manual comps. You get the real number and plug it into your deal analysis before you write an offer.
Run a free rent reportExpense estimation
New investors underestimate expenses. Every time. Budget 40% to 50% of gross rent for older properties (pre-2000). Budget 30% to 40% for newer construction. These are not guidelines. These are what actual operating statements show across thousands of properties.
Property tax
Varies by county
Use actual tax bill, not the assessed value estimate
Insurance
5% to 8%
Get a real quote. Rates have increased 20%+ since 2022
Vacancy
8%
Roughly 1 month per year. Tighter markets run 5%, soft markets hit 10%+
Management
8% to 10%
Budget this even if you self-manage. Your time has a cost
Maintenance
5% to 10%
Older properties trend higher. Plan for it
Capex reserves
5% to 10%
Roof, HVAC, water heater. These will fail. Save for them
The most common mistake: assuming you will have zero vacancy and zero maintenance. Both are guaranteed. Budget for them or your cash flow projections are worthless.
ROI calculation
Now you have rental income and expenses. Time to calculate whether this deal actually makes money.
Cap rate
NOI divided by purchase price. A $250K property with $12,210 NOI has a 4.9% cap rate. This tells you the return if you paid all cash.
Target: 5%+ in most markets. Sub-4% rarely makes sense for small investors.
Cash-on-cash return
Annual pre-tax cash flow divided by total cash invested. This is the number that matters most because it measures the return on your actual dollars.
Target: 8%+ for a deal worth doing. Below 6% and a REIT gives you similar returns with zero headaches.
DSCR
Debt service coverage ratio. NOI divided by annual mortgage payments. This tells you how much cushion you have above your loan obligation.
Target: 1.25x minimum. Below 1.0x means you are paying out of pocket every month.
Notice something. Every one of these calculations starts with rental income. If your rent projection is inflated by $350/mo because you trusted a seller proforma, every return metric is inflated too. The deal looks good on paper and bleeds cash in reality.
Physical inspection
Numbers check out. Now walk the property. You are looking for the big-ticket items that create surprise expenses in year one.
Roof
Asphalt shingle roofs last 20 to 25 years. A 22-year-old roof means a $8,000 to $15,000 replacement in your first 3 years of ownership. Factor this into your offer price.
HVAC
Furnaces last 15 to 20 years. AC units last 12 to 15. Replacement runs $5,000 to $12,000. Ask for the model number and look up the manufacture date.
Foundation
Cracks wider than 1/4 inch, stair-step cracks in brick, doors that stick, floors that slope. Foundation repairs start at $5,000 and can exceed $30,000. Walk away if the signs are bad.
Plumbing
Galvanized steel pipes in pre-1970 homes corrode from the inside. A full repipe costs $4,000 to $10,000. Check water pressure at every faucet and look for water stains on ceilings below bathrooms.
Electrical panel
Federal Pacific and Zinsco panels are fire hazards and need immediate replacement. Any panel under 100 amps will need upgrading. Panel replacement runs $1,500 to $3,000.
Water heater
Tank water heaters last 8 to 12 years. Check the label for the manufacture date. Replacement is $1,000 to $2,000. Not a dealbreaker, but it goes on the capex list.
Final decision
You have the location data. You have the real rent number. You have expenses modeled. You have ROI calculated. You have walked the property.
Now ask one question: does this deal meet my criteria at a price I can negotiate?
If the inspection reveals $25,000 in deferred maintenance, subtract that from your offer. If the real rent is $350/mo below the proforma, your offer should reflect that reality. The seller does not get to price the deal based on fantasy rents.
The best deals come from knowing the numbers better than the seller does. The worst deals come from accepting the seller's numbers without verification.
Quick screen
The 1% rule and when to ignore it
The 1% rule is a quick screen, not a decision tool. Monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/mo. A $300,000 property should hit $3,000/mo.
If a property fails the 1% rule, it does not mean the deal is dead. It means you need to look harder at the numbers. Properties in expensive coastal markets almost never hit 1%. New construction rarely does either. But in these markets, appreciation and tax benefits can compensate.
If a property passes the 1% rule, it does not mean the deal is good. A $100,000 property renting for $1,000/mo in a declining market with deferred maintenance can still lose money every month.
1% rule examples
$200K property, $2,100/mo rent
1.05%. Passes the screen. Keep analyzing.
$400K property, $2,200/mo rent
0.55%. Fails badly. Cash flow will be tight or negative.
$150K property, $1,500/mo rent
1.0% exactly. Looks great, but why is it so cheap? Investigate.
The 1% rule tells you where to look closer. It does not tell you to buy.
The critical point: even using the 1% rule requires knowing the actual market rent. Not the seller's asking rent. Not the proforma rent. The real, comp-supported market rent. That is where your analysis should start.
Walk away
Red flags that kill deals
Any one of these is enough to walk. Two or more together and you should not be making an offer.
Negative cash flow at market rent
If the property loses money at the rent the market actually supports, no amount of "value add" talk from the seller fixes this. You are buying a liability, not an asset.
Deferred maintenance exceeds 10% of purchase price
A $250K property needing $25,000+ in immediate repairs is a project, not an investment. Unless you are buying at a steep enough discount to absorb those costs and still hit your return target, pass.
Declining neighborhood rents
If rents in the zip code have dropped over the last 2 to 3 years, you are buying into a falling market. Your property will be worth less and rent for less in 3 years than it does today. Rent growth projections do not matter when the trend is negative.
Seller proforma rents 20%+ above market
When a seller's projected rent is 20% or more above what comps support, they are either delusional or dishonest. Either way, the asking price is based on numbers that do not exist. Negotiate aggressively or walk.
Your edge
How RentJudge fits into your deal analysis
Run a RentJudge report before you make an offer. Not after. Before.
Verify the rent
Enter the property address. RentJudge pulls comps, adjusts for amenities and condition using ML, and gives you the real market rent. Compare it to the seller proforma. Know exactly how far apart you are.
Calculate real returns
Plug the RentJudge rent estimate into your deal analysis. Cap rate, cash-on-cash, DSCR. All based on what the market will actually pay, not what the seller hopes for.
Negotiate with data
Share the RentJudge report with your agent or bring it to the negotiation. When the seller says the property rents for $2,200 and you have comp data showing $1,850, you negotiate from facts.
Stop trusting seller proformas. Stop spending hours scrolling Zillow trying to piece together comps by hand. Get the rent number right in 2 minutes and build your entire analysis on solid ground.
Know the real rent before you make the offer
RentJudge gives you a comp-based, ML-adjusted rent estimate in minutes. Free to use, no credit card required. Run the numbers that matter.
Run Your First Rent Report FreeRentJudge provides automated rent estimates for informational purposes only. Property evaluations shown are examples and will vary. Always conduct thorough due diligence and consult with qualified professionals before making investment decisions.