One of the most useful pre-purchase tests is simple: what happens to the property cash flow if interest rates rise?
Calculate the dollar impact
For an interest-only illustration, each 1 percentage point increase on a $500,000 loan adds roughly $5,000 a year in interest before considering other changes. Actual loan repayments depend on structure and lender terms.
Test more than one scenario
Run the property at today's rate, then add 1 and 2 percentage points. Combine the higher rate with a vacancy allowance so you are not testing risks one at a time.
Protect liquidity
A cash reserve can reduce the risk of selling at a bad time. Consider repairs, insurance excesses and changes in your own income as well as property costs.
Avoid relying on tax refunds
Tax rules and personal tax positions can change. The investment should not become unmanageable if the after-tax outcome differs from the estimate.