Underwriting a small rental is a sequence of documents, not a feeling about the kitchen. The listing rent is a wish until a lease or a leased comp supports it. The expense line is a slogan until a bill or a quote replaces it. The mortgage payment is one carrying cost, not the whole carrying cost. This page is the order to use when the goal is a decision. The calculators on this site will print a result from whatever you type. Arithmetic is not a property.
Nothing here is a recommendation to buy. County tax rules, insurance markets, and lender overlays move. The live documents win.
Lock the rent you could defend to a skeptical partner
Do not type the flyer’s “estimated rent” into a model and call the trip finished. Build a rent file: leased comparables with addresses, bed and bath count, date, and whether a concession was hiding in the deal. If the market is moving, prefer leases that are recent. If you cannot find them, you do not know the rent, and every ratio downstream is a costume on a guess.
Use the rent the subject can actually command, not the rent of the renovated comp with a garage the subject does not have. Note condition, street noise, and laundry in the unit. A haircut for a worse building belongs in the file as a sentence, not as a silent round-up. Other income — parking, laundry, pets — counts when a lease or a deposit history shows it. “Tenants usually pay” is not a line item.
If a tenant is in place, the in-place lease is the income until it ends. A plan to raise the rent is a scenario with a date, a legal path, and a chance the tenant leaves. Put that scenario on a second page. Do not overwrite the lease. The cap rate guide is what you do with the income after it is honest. Cap rate is not this step. This step is the rent file.
Rebuild expenses from paper
Several calculators on this site, including the Deal Analyzer and the mortgage calculator, subtract about 1.5 percent of purchase price per year as a blended stand-in for taxes, insurance, and maintenance. The tool pages say so. That plug is a screen so a first pass is not a blank cell. It is not an operating statement, and it will not survive contact with a coastal insurance quote or a county that reassesses on sale.
Replace it in this order, because this order is where deals actually die:
Taxes after you, not taxes during the seller’s long hold
Read the current bill so you know the parcel. Then ask the assessor or the title company what a sale does to assessed value. Some states reset on a change of ownership. Some limit the annual increase until that reset. The seller’s escrow is a history of their assessment, not a forecast of yours. Underwrite the tax you will pay. If you cannot get even a method — “it resets” or “it does not” — you are not done.
Insurance you can bind at this address
Quote the building, the roof year, and the occupancy. A landlord policy is not the seller’s homeowner policy. Wind, hail, and flood can show up as a deductible large enough to be its own capital event. If a broker will not bind, you do not have a loan and you do not have a deal, regardless of the rent file. Write the quote date next to the number so a month-old conversation cannot pretend to be current.
The bills the tenant does not pay
Water on a master meter, a landlord-paid trash contract, heat in a building with one boiler, lawn or snow the lease promises. Read the lease before you assume “tenant pays utilities.” Association dues and local landlord-license fees are not optional because they were absent from the flyer.
Vacancy, turnover, and the reserve you will actually fund
Vacancy is uncollected rent from this building’s gaps, not a national adjective. Turnover is the paint, the clean, and the days between keys. Repairs are the disposals and the windows. Capital items are the roof, the heat, the water heaters, and the floors on a cycle. A strict net operating income often leaves capital spending beside the ratio rather than inside it. You still have to fund it. A reserve of zero because the ratio looks better without one is a loan from a future year. The expense-stack guide walks those lines one at a time so the 50 percent nickname cannot hide them.
Management is a cost even when the manager is you. Either hire it and record the fee, or record the hours as a job you are buying. Leaving the line blank because you are willing does not make the line zero. It makes the statement incomplete.
Only then add the loan
Run the property as if the loan did not exist: income minus operating costs, divided by the price you would pay. That is the unlevered picture, a cap rate if you built the income correctly. If that yield is thin relative to the interest rate on the money you would borrow, debt is not a trick that creates return. It is a spread you are paying in exchange for owning an asset you could not buy with cash. That can still be a choice — you want the building, you can carry a bad month from other income, you have a value-add you have already bid. It is a choice you should write down. It is not a surprise the first month the rent is late.
Principal and interest come from the rate, term, and amount you were quoted. The mortgage calculator on this site will compute that payment from inputs you type. It will not know the tax or the insurance. Impounds, mortgage insurance, and association dues can sit inside the housing payment a lender counts even when your “P&I” cell looks calm. Match the payment to the loan estimate, not to a rate you remember from a video.
If the loan is a coverage-ratio product rather than a borrower-income loan, the lender’s rent and the lender’s payment definition control the file. That is a different worksheet. The DSCR loan guide lists the questions. Do not underwrite a conventional payment and then discover a prepayment penalty.
Stress the page that already hurts
A base case that barely works is not a base case. Lengthen the vacancy. Raise the premium. Drop in one capital repair you already saw on the inspection, priced with a bid or with a range the inspector’s finding supports — not a number you liked. If you would need a rent increase in the first year to survive that page, and you do not have a signed path to it, the offer is too high or the building is the wrong building.
The scenario simulator reprints assumptions you move with sliders. Use it after the documents exist. Using it on the 1.5 percent plug alone is a way to feel busy. The 1 percent rule is an even thinner screen. It can tell you which listings to open. It cannot finish this page.
What you carry into the offer
- The rent file: leases or leased comps, concessions noted, in-place rent separated from any raise you have not signed.
- The tax method: current bill, plus what a sale does in this county.
- The insurance quote or a written refusal to bind.
- A capital list with ages for roof, heat, water heating, and sewer, and a reserve you intend to fund.
- Two cash pages: one with the loan you were quoted, one with no loan, so you can see whether leverage is helping.
If those five do not exist, you are decorating a listing. The pre-offer checklist is the twelve items that should change the number, the contingency, or the decision to pass. The glossary is where cap rate, net operating income, and the on-site expense plug are defined without a sales pitch.
Take the five items to the lender and the inspector as questions, not as a victory lap. Underwriting is the refusal to let a photograph outrank a bill.
Educational only. This sequence is not a bid, a loan approval, or tax advice. Verify every figure with the assessor, the carrier, and the people you hire.