Long-Term Rentals01 · Deal Analysis

What the property will actually collect, and what that makes it worth.

Underwriting a long-term rental is mostly an exercise in not flattering the numbers. Each figure here is the input to the next — what a real year collects, what it costs, what that prices the asset at, and whether the result pays you and carries the loan. Seven guides, in the order they depend on each other.

Start here →See the guides in order →

Start here · The framing guide

Effective Rent & Economic Vacancy

Running a rental on asking rent is the easiest way to overstate a deal. This separates gross potential rent from the effective gross income a year actually delivers, and shows why the time a unit is filled and the dollars it collects are two different measures.

Matt Nunn · 8 min read

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What it covers

Why market rent times twelve is not the income you will have
Vacancy, turnover, concessions and late payment, separately
Physical vacancy and economic vacancy are two measures
The effective gross income the rest of the stack is built on

The curriculum

The guides, in dependency order.

The stack is built from the income down. Expenses come off the effective rent, the result prices the asset, and only then can you ask what the deal pays and whether it clears the payment.

Build the stack
Costs come off the income, and what is left is the number the market prices. Both steps are places where a deal gets flattered without anyone deciding to.
- ConceptThe Operating-Expense Build & the 50% RuleHalf the rent is a sanity check, not an underwrite. Building the costs line by line from the property in front of you is the underwrite.
- ConceptNormalized NOI & Cap RateThe same building is a 6.5% cap or a 5.5% cap depending on whose NOI convention you use. Normalizing is what makes the number mean anything.
Then the returns, and the coverage
Two different questions asked of the same property: what it pays on the cash you put in, and whether the operating income clears the debt service.
The screens, kept in their place
A filter that ranks a page of listings in minutes is worth having, as long as it is never mistaken for the underwrite.
- ConceptGRM & the 1% RuleOne division each, and a page of listings ranks in minutes. They tell you what deserves a closer look, never whether to buy.

Decision guides

When there is a real choice.

One decision, and it is not a threshold being cleared. Whether a rental pencils is whether it meets your objective at a risk you accept — and whether it still does when the assumptions do not all come true.

Decision
Does This Rental Pencil?
Buy, pass, or renegotiate — measured against your objective and your tolerance for the assumptions being wrong, rather than against a number.
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What the property will actually collect, and what that makes it worth.

Effective Rent & Economic Vacancy

The guides, in dependency order.

Build the stack

Then the returns, and the coverage

The screens, kept in their place

When there is a real choice.

Does This Rental Pencil?

What this makes possible.

Financing

Bookkeeping & Reporting

Wealth & Exit