How to Analyze a Rental Property: Cash Flow & Due Diligence

You’ve found a property that looks great on paper. The listing shows solid rental income, decent cash flow, and the price seems fair. Should you put in an offer?

Not yet. Not until you’ve done the real work.

Too many investors get burned because they skip proper analysis. They trust the listing, run some quick numbers, and jump in. Then they discover the rental income was overstated, half the units aren’t legal, or the expenses were way higher than expected.

Let’s walk through exactly how to analyze a rental property the right way, so you don’t end up with a money pit.

Set Your Target Before You Start Looking

Here’s the biggest mistake investors make: they look at property after property, comparing each one, trying to find the perfect deal. This is called analysis paralysis, and it stops people from ever taking action.

The fix is simple. Before you look at a single property, decide how much Cash Flow you want per door per month. Pick a number you’re happy with. Maybe it’s $200 per door. Maybe it’s $500. Whatever works for your goals.

Now when you analyze a property, you’re not comparing it to other properties. You’re just asking one question: does this property meet my target? Yes or no. If yes, you can move forward. If no, you pass and move on.

This approach lets you make clear decisions instead of endlessly comparing properties and never buying anything.

Book Your Strategy Call

Start With Legal Units

This is absolutely critical, and it’s where many investors get destroyed financially.

You find a house being marketed as a duplex. It has a main floor and a basement apartment. The numbers work perfectly. You buy it. Then you discover the basement suite isn’t legal according to zoning. The city says you can only rent the main floor.

Your investment just went from profitable to underwater. This actually happens to people, and it can bankrupt you.

Always verify that every unit is legal before you run your numbers. Don’t count illegal suites in your analysis, no matter how they’re marketed. Cities across Canada enforce these rules, and they can stop you from renting units that don’t meet legal requirements.

Get the Real Rental Income Numbers

MLS listings are almost never accurate when it comes to rental income. Sometimes it’s an honest mistake. Sometimes landlords are showing market rent instead of what tenants actually pay. Sometimes they’re using old numbers that no longer apply.

Here’s what you need to get from the seller:

Rent roll showing all units and actual rental amounts
Past two years of tax returns (they can cover other info, just show the rental income section)
Bank statements proving the deposits match the stated rent

Match the bank deposits to the leases. This is exactly what lenders do when you apply for financing, and you should do the same thing as a buyer.

Don’t trust what the listing says. Get proof.

Watch Out for These Income Tricks

A tenant damages a unit. The landlord knows they’re selling, so they don’t fix it. They re-rent it for less than before. But the listing still shows the old, higher rent amount.

Or the listing shows what units could rent for at market rates, but the actual leases are $200 lower per unit.

These situations happen all the time. The only way to catch them is to verify the actual numbers with documentation.

Factor in Every Expense

Here’s where investors mess up their calculations. They skip expenses or use numbers that are way too low.

Use a Vacancy Rate

Even in hot markets, use a 4-8% vacancy rate. There will be months when units sit empty. Factor this in now so you’re not surprised later.

If your market has a higher vacancy rate, use the actual rate. But don’t go lower than 4% just because your market is hot right now. Markets change.

Always Include Repairs and Maintenance

Even for brand new renovations. Even for fully updated properties.

Toilets break. Drains leak. You can’t see problems until people actually live in the property. Contractors make mistakes. Things fail.

You can factor in lower repair costs for newer properties, but never eliminate this expense completely.

Don’t Forget These Expenses

Property management fees (yes, you should always use a property manager)
Property taxes (annual amount divided by 12)
Insurance (get a quote from an insurance company)
Utilities (get the past two years of actual bills from the seller)
Professional fees for lawyers, accountants, bookkeepers

On utilities, you can’t predict how tenants will use them. Get the seller’s historical costs. This gives you real data instead of guessing.

Make Properties More Efficient

You can control utility costs by upgrading to energy-efficient systems. High-efficiency furnaces, modern air conditioning, LED bulbs everywhere.

Buy LED bulbs in bulk online for around $1 each instead of paying $5-10 at retail stores. Replace every bulb in the property. This simple step drops electricity costs significantly.

Run the Complete Cash Flow Analysis

Once you have all your real income and expense numbers, you can calculate your actual cash flow. Take total income, subtract all expenses, and you get your Net Operating Income (NOI).

This doesn’t include your mortgage payment yet, because financing varies by investor. Some people pay cash. Others get mortgages with different terms. NOI shows you how the property performs on its own.

Then factor in your mortgage payment. Now you can see your real monthly cash flow and your Cash-on-Cash Return on investment.

Does it meet your target number? If yes, keep going. If no, pass on the property.

Talk to the Neighbors

This step sounds weird, but it catches problems you’d never find in documents.

Walk to a house a couple doors down from the property you’re considering. Knock on the door. Tell them you’re thinking about buying the property down the street. Ask what the tenants are like. Ask about the landlord.

If there are problem tenants, neighbors will tell you. They’re usually happy to share information, especially if they’ve been dealing with issues.

This five-minute conversation can save you from buying a nightmare property.

Get the Free Analysis Tool

You don’t have to build your own spreadsheet for all these calculations. There’s a free rental worksheet and cash flow calculator that walks you through every step.

Visit the Canadian Real Estate Network and look for the Free Downloads section on the homepage. Enter your email and first name, and you’ll immediately get the Investor Toolbox Success Kit with the cash flow calculator, plus other helpful resources.

No spam, no obligation. You can even unsubscribe right away and keep the tools.

Only Move Forward When Everything Checks Out

Here’s your checklist before you buy:

Numbers run through the cash flow calculator
Property meets your cash flow target
All units are verified legal
Rental income verified with rent rolls, tax returns, and bank statements
All expenses verified with supporting documents
Neighbors confirmed no major issues

Only when all of these boxes are checked should you move forward with the purchase.

This process takes more time than just trusting a listing. But it protects you from the mistakes that turn good-looking deals into financial disasters.

Anyone can submit an offer on a property. But that doesn’t make it a good investment. Do the work upfront to make sure the numbers are real and the property actually performs the way you expect.

That’s how you build a rental property portfolio that actually makes money instead of draining it.

Book Your Strategy Call

Frequently Asked Questions

How much cash flow per door should I target for rental properties?

Set your own target based on your investment goals before you start analyzing properties. This might be $200 per door or $500 per door. The specific number matters less than having a clear target so you can make yes-or-no decisions instead of endlessly comparing properties.

How do I verify that rental units are legal?

Check with your local municipality to confirm the zoning allows the number of units being advertised. Don't trust how a property is marketed. A house with a basement apartment might be marketed as a duplex, but if zoning only allows single-family use, you won't be able to legally rent both units. Cities enforce these rules and can stop you from renting illegal units.

What vacancy rate should I use when analyzing rental properties?

Use a 4-8% vacancy rate even in hot markets. If your market has a higher vacancy rate, use the actual rate. Never go below 4% just because your current market is tight. This gives you financial wiggle room for the inevitable months when units sit empty between tenants.

How can I verify the rental income shown on a property listing?

Request three documents from the seller: a rent roll showing all units and rental amounts, the past two years of tax returns showing rental income, and bank statements proving deposits match the stated rent. Match the bank deposits to the leases to confirm tenants are actually paying what the seller claims.

Should I include repair costs for a fully renovated property?

Yes, always include repairs and maintenance even for brand new renovations. Toilets break, drains leak, and contractor mistakes emerge once people actually live in the property. You can factor in lower costs for newer properties compared to older ones, but never eliminate this expense completely.

Do I need a property manager for a single rental unit?

Yes, always include property management fees in your analysis and budget. Professional managers know how to properly screen tenants, which is a critical skill that can make or break your investment. Many problems arise when investors try to self-manage without proper expertise.

Why are MLS listings often inaccurate for rental property income?

Listings may show market rent instead of actual lease amounts, use outdated information, or have incomplete expense data. Sometimes tenants damaged units and landlords re-rented for less but the listing still shows old numbers. Sometimes it's honest mistakes, but the result is the same: you can't trust listings alone. Always verify with documentation.

What should I ask neighbors before buying a rental property?

Go to houses a couple doors down and tell them you're considering buying the property nearby. Ask what the tenants are like and what the landlord is like. If there are problem tenants or undisclosed issues, neighbors who've been dealing with problems will usually tell you. This five-minute conversation can reveal issues you'd never find in documents.

Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.

Written by

LendCity

Published

December 22, 2025