How to Analyze a Rental Property

Step 1 — Verify the income, do not accept it

Start from documents, not from the listing. Leases, rent rolls, bank deposits and utility bills are evidence; a pro forma is a marketing document.

Separate current rent from market rent. Current rent determines what you can finance and what you will collect on day one. Market rent tells you where the upside is, and Ontario's rules on rent increases and vacancy determine how quickly you can realistically get there.

• Collect current leases and note start dates, terms and included utilities.
• Ask for 12 months of rent deposits, not a summary.
• Compare each unit to rental comps of similar size, condition and location.

Step 2 — Rebuild the operating expenses from scratch

Most bad deals are bought on optimistic expenses. Rebuild every line yourself: property taxes from the assessment, insurance from a real quote, utilities from actual bills, maintenance from the age and condition of the systems, and management at market rate even if you plan to self-manage.

Keep capital expenditures out of NOI but carry them in a separate reserve. A roof, furnace or window replacement is not an operating cost, yet it is very much a cost.

Step 3 — Calculate NOI and the return metrics

Net operating income is effective gross income minus operating expenses. From it you get cap rate, DSCR and, once financing is layered on, cash flow and cash-on-cash return.

Read the metrics as a set. A strong cap rate with a weak DSCR means the financing is stretched. Healthy cash flow with a thin DSCR means you are one vacancy from trouble.

Step 4 — Model the financing honestly

Use a rate you can actually get today, and then model the renewal. On a five-year term with a ten-year hold, your rate is an assumption for half the holding period.

Longer amortisation improves DSCR and cash flow while increasing total interest. That trade-off is a strategy decision, not a rounding detail.

Step 5 — Stress test before you commit

Run at least three downside cases: rent 10% below plan, vacancy at double your allowance, and the mortgage rate 200 basis points higher. If the deal only survives the base case, it is not a deal, it is a bet on conditions.

Write down which single input breaks it first. That input is what you monitor after closing.

Step 6 — Set a maximum offer and hold the line

Your ceiling is the lower of the price that hits your target return and the price your lender's DSCR requirement supports. Compute it before you negotiate.

If asking price exceeds your ceiling, the answer is usually to pass or to offer at your number and let the seller decide. Discipline compounds across a portfolio.

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