Back of the Napkin Property Investment Analysis

A quick and easy method to understand the quality of an investment is to take the rental income, divide it by the price of the home (don’t forget to add repair costs), multiply by 100, and the # you're left with is called a Cap Rate. The more homes you analyze like this, the better you’ll understand what Cap Rate is common throughout any market. Currently here in Charlottesville it is about 5%. 6% is attainable though. Both are pretty tight in regards to cash flow ($ left over after paying all expenses and mortgage).
There is more to understanding whether or not a potential investment property is a good one. The Cap Rate offers an easy method to compare properties on the surface level. Although it's a great thought provoking process and helps you to understand the numbers a bit more, do not get stuck on this one tool for your evaluation. If you're considering buying an investment, I highly recommend the practice of calculating cap rates on many homes. You'll see some patterns begin to emerge. 

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