Written by our brilliant interns: Haasini Kishore, Iqra Chawdhary, Rishi Srinivasan, Megha Venkatesan, and Paige Foley

The art of real estate begins with the exchange of money for a valuable property. But when starting this process it’s necessary to understand the diverse and multiple elements that factor into the decision of buying a property. Today, we are explaining the 5 key steps that are essential in understanding why and what property to invest in. 

Step 1: Understand the Key Metrics

Before you start plugging numbers into a calculator or comparing properties, the first and most important step in analyzing a rental property is understanding the key metrics that determine whether a property is a good investment. To understand the key metrics, there are 6 main things that are important to know.

Purchase price

This is the total cost of the property which includes purchase price of the home plus closing costs. Closing costs are expenses beyond the down payment, such as appraisal fees, attorney fees and escrow funds, that you pay on closing day which usually add 2 – 5% of the purchase price 

Down Payment 

This is how much of the property’s purchase price you will pay in cash, directly upfront at closing. But why does this matter? It directly impacts your loan size, monthly payment, and long term returns. The higher your down payment, the less you have to borrow from the bank, which reduces your monthly mortgage payments and overall interest paid. It also increases your equity in the property right away, improving your loan-to-value ratio which lenders look at when evaluating your risk.

Loan Amount & Interest Rate

Once purchase price and down payment is determined, the remaining balance is what you’ll borrow from a lender—this is your loan amount. An interest rate is the cost you pay to the lender for borrowing money to finance your loan, on top of the loan amount. This is a percentage you pay annually on the loan amount. Investment properties usually have higher interest rates than primary residences—often between 6% and 8%, but this varies with the market and your credit profile. Multiple factors that affect interest rate are: 

1. Loan type
2. Property type
3. Loan-to-Value ratio 
4. Market Conditions
5. Credit Score

Monthly Rent 

Monthly rent is the amount you expect your tenants to pay each month to live in the property. Properties in great school districts or with upgrades (AC, washer/dryer, parking) can earn more. Steps to estimating monthly rent properly include: 

1. Looking at comparable properties in the same neighborhood (same number of beds/baths, similar condition).
2. Using tools like Bricksfolios
3. Checking current listings, but also try to find what similar homes have actually rented for recently

Operating Expenses

You also need to account for the ongoing expenses that eat into your profits. These are called operating expenses and they include: 

1. Property Taxes: Local governments charge annual taxes based on your property’s assessed value. This can vary widely by area so check with the county or city tax assessor
2. Insurance: Landlord insurance covers your property against fire, liability, and other risks
3. Maintenance and Repairs: Even well-maintained properties need ongoing repairs,  plumbing leaks, HVAC tune-ups, lawn care, painting, etc. A tip is to budget 5–10% of your monthly rent for maintenance.
4. Vacancy Allowance: No property rents 100% of the time. Budget for some months when your property is empty between tenants. This is usually 5–8% of annual rent
5. HOA Fees: If your property is part of a homeowner’s association, include monthly or annual HOA fees
6. Utilities: If you pay for water, electricity, gas, or trash services, factor these in too

Mortgage Payment

Mortgage payment will be one of the biggest expenses. A mortgage payment is the amount you pay each month to your lender for borrowing money to buy a property. It is made of 2 parts: 

• Principal – The portion that goes toward paying down the loan balance.
• Interest – What you pay the lender for borrowing the money.

Together these 2 parts make up your P&I payment which is the number to be plugged into cash flow calculations. To estimate it use a mortgage calculator. You’ll need:

1. Loan amount
2. Interest rate
3. Loan term

Step 2: Running Key Calculations 

This step helps you determine if a rental property is profitable, risky, or worth investing in. As one of the most important parts of analyzing your property, this step involves calculating cash flow, capitalization rate (cap rate %), and cash-on-cash return (COC%). 

Cash Flow: are you really making money each month? 

1. Cash flow = monthly rental income – monthly expenses (mortgage, taxes, etc.)
2. Positive cash flow means you earn money every month after paying all your bills. By calculating or predicting your cash flow every month ensures you really are gaining money off your rental property. In other words, to most people, your total wealth gain is your cash flow. 
3. Ex. for a certain property, if your monthly rent is $1,800, mortgage is $1,050, property tax is  $200, insurance costs are $100, maintenance/repair costs are $75, and vacancy (5%) is $90 then…
   1. Total expenses = $1,515 
   2. Cash Flow = $1,800 − $1,515 = $285/month (positive)
   3. $3,420/year of passive income*

Cap Rate (Capitalization Rate %): is the property truly a good deal overall? 

1. Cap rate % = (net operating income / purchase price) x 100
   1. Net operating income (NOI) = gross rent – operating expenses (excluding mortgage) 
2. Cap rate percentage tells you how profitable a property is, aside from your mortgage. It provides a way to compare properties fairly, and gives you a true comparison regardless of how you decide to finance it (cash vs. mortgage). 
3. Ex. a house that costs $200,000, rents for $1,800/month, and has $7,200/year in expenses would have…
   1. NOI = $21,600 – $7,200 = $14,400
   2. Cap Rate = ($14,400 ÷ $200,000) × 100 = 7.2%
4. For many suburban areas, a good cap rate to stay at is around 6-8%. Anything less would be considered low (stable for urban markets) and anything higher would be considered risky.

Cash-on-Cash Return Rate (COC%): what are you making on the actual investment?

1. Cash-on-cash return % = (annual cash flow / total cash invested) x 100
   1. Cash invested = down payment + closing costs + renovation
   2. COC% measures how much profit you’re making each year from the actual cash you invested at the start – NOT the total price of the property. 
   3. Ex.  a property with an annual cash flow of $3,420, a down payment of $40,000, closing costs of $5,000 and repair costs of $5,000 then…
      1. Total cash invested = $50,000
      2. Cash-on-cash return = ($3,420 ÷ $50,000) × 100 = 6.84%
   4. In most suburban areas a COC% of 8-12% or higher is stable, but this depends on the market conditions and level of risk. 

*passive income: money earned without actively working every hour for it (money grown through investments) 

Step 3: What to Know About a Neighborhood Before Buying a Rental Property

When it comes to real estate investing, location is everything. The success of a rental property depends heavily on the neighborhood it’s in. Factors like tenant demand, rent potential, property appreciation, and long term stability are all shaped by the location. 

Job Growth and Economic Activity

Strong job markets are closely tied to rental demand. Neighborhoods with a growing number of employment opportunities typically attract more renters and experience steady population growth. Areas with growing employment opportunities naturally attract more renters, and in many cases, those renters are willing to pay a premium for convenience and accessibility.

How to research it:

• Use city economic development websites for future projects
• Check news for new business opening or closures
• Brown’s LinkedIn job postings to see how many companies are hiring in the area. 

School Quality and District Ratings

Even if you don’t plan to rent to families, buying near a good school district is still smart. Properties near highly rated schools tend to hold their value better and see higher demand. High-performing school districts tend to indicate overall neighborhood stability and homes near good schools typically appreciate fasters. 

Crime Rates and Safety

Safety is non-negotiable. Most renters, especially families, professionals, and students want to feel secure where they live. Even if a property looks like a good deal on the surface, high crime rates can lead to tenant turnover, property damage, and decline value over time. 

What to look for:

• Violent crime vs. property crime
• Crime trends either increasing or decreasing recently
• Community involvement and local policing efforts

Beyond those factors, it’s important to dig into the local rental markets itself. Look up comparable rental properties which are also often called “comps” to understand what similar units are charging for rent. This helps you set realistic rent expectations and avoid overestimating your income. Websites like Bricksfolios and other legacy portals are great as they show current rents, trends, and even vacancy rates. You can learn about nearby amenities, public transportation, and any future developments that might make the area more desirable. Doing this kind of research helps make sure you don’t overestimate your rental income.

Taking the time to learn about the neighborhood helps you make smarter investment choices and avoid surprises down the road. A good location not only attracts reliable remnants but also protects your investments as property values grow

Step 4: Remember the Hidden Costs 

Hidden costs have extreme importance when it comes to analyzing your real estate property. These may be factors you don’t think about at first but have equal importance in the final decision of buying a property.

Closing Costs

Closing costs are defined as fees and expenses and paid when finalizing a real estate transaction. 

They range from 2-5% of the home’s purchase price. The various types have diverse purposes, all of which can factor into your final decision to buy a property. 

1. Loan origination fee: These cover the lenders administration cost for processing mortgage fees
2. Appraisal fee: This pays for an independent professional to assess the properties market values
3. Home inspection fee: This covers the cost of professional inspection to identify any issues with this property
4. Title Insurance: This protects the buyer and lender against potential title disputes
5. Attorney Fees: These cover legal service related to the transaction such as reviewing documents and ensuring proper transfer of ownership
6. Recording fees: These are paid to the local government for officially recording the transfer
7. Transfer taxes: These taxes imposed by the government on transfer of property ownership
8. Prepaid interest: This covers the interest that accrues on the mortgage  from the closing date until the first payment is due
9. Homeowners insurance: This covers the cost of insuring properties against damage or loss
10.  Escrow fees: These fees charged by the escrow company for handling the financial aspects of the transaction
11.  Real estate commissions: These are the fees paid to real estate agents for their service

Who Pays What?

Buyers and sellers both have specific roles in buying these various closing costs. Both of which are impacted by these various costs. It is important to be aware of the costs you need to pay vs the buyer vs the seller.

• Buyers: Pay for loan origination, appraisal, inspection, title, recording fees, transfer taxes, prepaid interest, homeowners insurance and escrow fees
• Sellers: Typically pay for real estate commissions, real estate excise, a portion of escrow fees, and their share of property taxes or HOA dues

Furthermore, there are multiple considerations regarding these factors. Firstly, negotiation, closing costs can be negotiated between the buyer and seller which can potentially shift expenses or even reduce costs. Secondly, state and loan specifics, closing costs can vary on where your property is located and the type of loan being used. Finally, planning, it’s crucial to plan for closing costs as they can be significantly expensive.

A great option for calculating closing costs is using Bricksfolios fantastic closing cost calculator; it outperforms other legacy platforms by offering much more data and tools that can help you make your final decision in buying a property.

Repairs & Renovations

Renovations and repairs significantly impact real estate value and sale price. Costs will vary depending on the extent of the work, materials and location.

1. Scope of the project: Major renovations like “gutting” a house can cost $100k-$200k, while smaller projects (ex: bedroom modeling) can range from $4,000 to $40,000.
2. Materials
3. Labor
4. Location
5. Supply chain: disruptions can drive up the cost of materials, or even drive up which would benefit you. 

Property Management Fees (8-10% of Rent)

Again, this post is back to talking about specific fees that are necessary. If you plan to hire a property manager (especially for out-of-state or passive investing), they typically charge 8-10% of the gross monthly rent. This covers various services such as: 

1. Tenant screening
2. Rent collection
3. Maintenance coordination
4. Evictions (if necessary)

If rent is $1500/month and the fee is 10%, you’ll pay $150/month to the property manager.

Pro tip: Some managers also charge leasing fees, renewal fees, or maintenance markups, so read the contract carefully. 

Home Owner Association Fees

If the property is in a condo, townhouse, or planned community, you may be required to pay Homeowners Association (HOA) fees. 

These can range from $100 to $500+ per month, depending on factors such as:

1. Location
2. Amenities (pool, gym, and landscaping)
3. Services covered (trash, snow removal, water, and exterior repairs)

HOA fees are non-negotiable and must be included in your monthly expense calculation. 

Downside for investors: Some HOAs limit or ban renting altogether or charge a separate “landlord fee”.

Overall, it’s important to be mindful of these various “hidden costs” when analyzing a property. By keeping these multiple topics and subjects in mind will let you make well-thought, analytical, and decisive  decisions in buying property. 

Step 5: Ask the Right Questions

Is this a long-term or short-term investment?

It’s important to define your investments as it can shape your financing strategy to your renovation decisions. A long term investment would be buying a second home as an investment and renting to long term renters or short term vacation renters. Long-term real estate investments offer several benefits including appreciation, passive income potential, reduced transaction costs as you will complete fewer real estate transactions, extra tax advantages in comparison to short term investments, and an inflation hedge due to the value of real estate rising during periods of inflation. On the other hand, short term investments like home flipping focus on quicker returns but often require more hands on management. Some examples of short term real estate benefits are market flexibility and being able to quickly adapt to market changes and trends, not having capital tied up for extended periods of time, and having potential for higher profit margins if executed well. Both long and short term investments prove beneficial, but “the best” type will vary from one investor to the next. 

Can the area support rent increases over time?

Look at similar properties, local market trends, population growth, job opportunities, planned developments, and understand legal limitations and requirements to evaluate possible reactions. If the surrounding area is attracting new businesses, improving schools, or upgrading infrastructure, those are all good indicators that future rent increases can be supported.

What’s your backup plan if it doesn’t rent right away?

This can happen, and that’s okay. Having a plan like setting aside funds for a few months of mortgage payments can help protect you and your investments. To fix the vacancy, it’s crucial to assess the situation, address potential issues, and adjust your strategy. This involves understanding why it’s not renting, making needed improvements, and possibly adjusting pricing. To be a smart investor you must evaluate potential scenarios and be prepared to combat them.

One Last Step

The steps and skills described in this blog will be useful tools in your property-investing kit. For the best experience in real estate ventures, we urge you to use these essential steps — they will ensure that the properties you invest in benefit you for years to come!

Thank you and good luck with all your future real estate endeavors!

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