How to Avoid Wasting Time on Bad Deals

Quick Summary:

• It’s easy to spend hours analyzing a deal—only to realize it was never going to work.

• Cap rate shows how much return a property generates based on its price.

• It’s your first filter for deciding if a deal is worth deeper analysis.

• I use three phases when analyzing a property:

  • Initial Scan – Quick filter to eliminate bad fits

  • Deal Check – A deeper look to validate potential

  • Deep Dive – Final, document-backed analysis before I commit

• Each phase brings better numbers—and better decisions.

• Cap rates vary by location, market condition, and property type.

TIRED OF RUNNING THE NUMBERS ON DEALS THAT GO NOWHERE?

If you’ve been in real estate investing for more than a minute, you’ve probably wasted time digging into a deal that didn’t stand a chance. You estimated rents, called the broker, maybe even visited the property—then realized the math would never work.

Cap rate helps you avoid that trap.

When used properly, it becomes a fast and flexible filter—helping you skip overpriced or underperforming listings and focus on the ones that are actually worth your energy.

Let me show you how I use cap rate in three phases to quickly sort through deals, save time, and stay focused on what really matters.

WHAT IS A CAP RATE?

Cap rate—short for capitalization rate—measures how much return a property earns in a year based on what you paid for it. It’s one of the simplest and most powerful tools in real estate.

To calculate cap rate, you need to know your Net Operating Income (NOI).

NOI is your total annual rental income, minus all operating expenses (not including your mortgage). These typically include:

• Property taxes

• Insurance

• Maintenance and repairs

• Property management fees

• Utilities (if owner-paid)

• Landscaping and services

Example Calculation:

Your property collects $15,000/year in rent. You estimate:

• Taxes: $2,000

• Insurance: $1,000

• Maintenance: $4,000

• Property management: $3,000

Total Expenses = $10,000NOI = $15,000 - $10,000 = $5,000

If you paid $100,000 for the property:

Cap Rate = $5,000 ÷ $100,000 = 0.05 → 5%

That’s a 5-cap. If the return were 6%, you’d hear it referred to as a “6-cap.”

WHY CAP RATES MATTER (AND SAVE YOU TIME)

Cap rate helps you:

• Quickly screen out deals that won’t cash flow

• Understand what a property is worth based on income—not just comps

• Spot potential incorrect pricing or unrealistic seller expectations

It also reflects market dynamics:

Higher cap rate = more annual income, but usually less appreciationLower cap rate = less income, but more baked-in growth expectations

Example:

Your property earns $5,000/year in NOI. If the market expects a 6% return:

$5,000 ÷ 0.06 = $83,333

Your $100K property might now sell for $83K—even though the income stayed the same.

Cap rate helps you identify this shift before wasting your time.

HOW I USE CAP RATE TO FILTER DEALS

I use cap rate in three phases throughout the investment process. Each one gives me a clearer picture, and each helps me avoid bad fits.

1. INITIAL SCAN (CAP RATE) – QUICK SCREENING

Your fast filter to eliminate bad deals early.

Steps:

• Estimate annual rent

• Apply expected vacancy (8–10%)

• Estimate expenses (30–45%)

• Calculate NOI and divide by asking price

💡 Tip:Use Census data, broker reports, or real estate institutes to estimate vacancy rates in your area.

Example:

• Rent: $2,500/month × 12 = $30,000

• Vacancy (10%): $30,000 × 90% = $27,000

• Expenses (40%): $27,000 × 60% = $16,200 NOI

• Asking price: $270,000

Cap Rate = $16,200 ÷ $270,000 = 0.06 → 6%

If you’re targeting a 6-cap, this is a go. If it’s closer to 4%, it’s likely a pass.

This stage alone can save you hours.

2. DEAL CHECK (CAP RATE) – YOU’RE INTERESTED

The initial scan looks good—now you start gathering more detailed info.

You’ll likely now have access to:

• A rent roll (actual or broker estimates)

• Unit conditions and upgrades

• Broker pro forma (use with caution)

You also begin refining expenses:

• Roof condition

• Appliance age

• Common area maintenance needs

This phase helps prevent you from wasting time—or getting under contract—on something that looks better than it really is.

3. DEEP DIVE (CAP RATE) – UNDER CONTRACT

You’re under contract. Now it’s time to verify everything.

What to collect:

• Signed leases and rent ledgers

• Utility bills

• Service contracts (landscaping, trash, pest)

• Insurance quotes

• Renovation invoices or incentives

• Actual vacancy and tenant behavior

Example:

• Actual rent: $2,400/month × 12 = $28,800

• Vacancy (8%): $28,800 × 92% = $26,496

• Expenses: $11,496

• NOI = $26,496 - $11,496 = $15,000

• Purchase price: $250,000

Cap Rate = $15,000 ÷ $250,000 = 0.06 → 6%

Now you're working with reality—not a broker's spreadsheet.

BONUS: SPOTTING HIDDEN OPPORTUNITIES

Sometimes a low cap rate deal has strong upside—because rents are far below market.

Example:

• Rent: $1,200/month × 12 = $14,400

• NOI: $10,000

• Asking price: $166,667

• Cap Rate = 6%

But if market rent is $1,500/month:

• New rent: $1,500 × 12 = $18,000

• NOI (same expense ratio): $12,500

• New Cap Rate = 7.5%

That’s built-in potential you only see if you analyze closely.

FINAL THOUGHTS

Cap rate isn’t just a return metric—it’s a time filter.

It helps you:

• Skip overpriced listings

• Say no faster

• Focus on deals that actually work

Most investors waste time analyzing deals that never had a shot. You don’t have to be one of them.

Start with the Initial Scan.

Move into a Deal Check.

Verify everything in the Deep Dive.

And only spend time on deals that deserve it.