Analyse a rental property like an investor: cap rate, cash-on-cash return and true monthly cash flow after every expense.
Two numbers tell you most of what you need to know about a rental. The cap rate is the property’s net operating income (rent minus all operating expenses, excluding the mortgage) divided by the purchase price. Because it ignores financing, it lets you compare properties apples-to-apples: a 7% cap rate property earns more per pound or dollar invested than a 5% one, regardless of how you pay for it. The cash-on-cash return goes further — it divides your actual annual cash flow (after the mortgage) by the cash you put in (down payment plus closing costs). This is the number that tells you what your money is doing for you, and leverage can make it much higher than the cap rate.
Beginners routinely underestimate costs, which is why this calculator includes vacancy, maintenance and management by default. Budget 5–10% of rent for vacancy even in hot markets — tenants change and units sit empty. Maintenance averages about 1% of the property value per year, more for older buildings. And if you self-manage, still include a management line: your time has value, and one day you may hire it out. The single biggest destroyer of rental returns is buying with too little cash flow cushion, so be honest with every line.
The 1% rule says monthly rent should be at least 1% of the purchase price for the deal to cash-flow — increasingly hard in expensive coastal markets, which is itself useful information. Many investors target a cap rate above 6–8% and a cash-on-cash return above 8–12%, though targets vary by market risk. Use this calculator to test sensitivity: what happens to cash flow if rents dip 10% or rates rise 2 points?
It depends on the market, but many investors look for 6–8%+ on residential property. Higher cap rates usually mean higher returns and higher risk or lower growth areas.
Annual pre-tax cash flow divided by the total cash you invested (down payment plus closing costs). Unlike cap rate, it accounts for your mortgage, so it reflects your actual return on money invested.
Monthly rent should be at least 1% of the purchase price (e.g. $2,000 rent on a $200,000 property). It is a quick screening rule — deals that fail it rarely cash-flow.
Yes, at least mentally. Include a management fee even if you self-manage, so you know the property works as a true investment rather than a second job.
No — cash flow here is pre-income-tax. Rental income is taxable (with deductions for interest, depreciation and expenses in the US), so your after-tax return will differ.
Most residential investors target a cap rate of about 6–8% or higher, but ‘good’ depends on the market — a 5% cap rate in a stable, appreciating city can beat a 9% cap rate in a declining one. A useful cross-check is the spread over your mortgage rate: if you borrow at 6.5% on a property with a 5% cap rate, leverage is working against you. Use the calculator above to test your deal, then stress-test it: what happens to cash flow if rents fall 10% or rates rise two points?