Rental property investing can build serious wealth — but only if you buy the right properties at the right price. The difference between a good deal and a money pit often comes down to three numbers that take about 5 minutes to calculate.
Cap Rate: The Property's Intrinsic Value
Cap rate (capitalization rate) measures a property's income potential independent of financing. Formula: Cap Rate = (Net Operating Income / Property Value) × 100. NOI is your annual rent minus all operating expenses — but NOT including mortgage payments.
A $300,000 property renting for $2,200/month with $500/month in expenses has NOI of ($2,200 - $500) × 12 = $20,400. Cap rate = $20,400 / $300,000 = 6.8%. Generally, 5–8% is considered reasonable in most US markets. Below 5% means you're paying a premium (common in hot markets). Above 8% often means higher risk.
Cash-on-Cash Return: The Real ROI on Your Invested Dollars
Cash-on-cash return (CoC) measures your actual return on the cash you invested, accounting for financing. Formula: CoC = (Annual Cash Flow / Total Cash Invested) × 100. If you put down $60,000 on a property and net $4,800/year after mortgage, expenses, and vacancy, your CoC is 8%.
Many investors target a minimum 8% cash-on-cash return. In expensive markets, 5–6% may be acceptable if you expect strong appreciation.
Monthly Cash Flow: The Reality Check
Monthly cash flow = Rent - Mortgage - All operating expenses. Operating expenses include: property taxes, insurance, property management (8–10% of rent), maintenance reserve (1% of property value annually), and vacancy reserve (5–8% of rent).
New investors frequently underestimate expenses. A $300,000 property has roughly $3,000/year in maintenance alone ($250/month). Factor in property management and vacancy, and the cash flow picture changes dramatically from naive projections.
The 1% Rule: A Quick Screening Tool
The 1% rule says monthly rent should be at least 1% of the purchase price. A $300,000 property should rent for at least $3,000/month. In expensive markets (San Francisco, NYC, Seattle), this rule rarely works — properties commonly rent for 0.4–0.6% of price. In Midwest and Sun Belt markets, 1% deals still exist.
Run every potential deal through all three metrics before making an offer. A property might pass the 1% rule but fail on cash-on-cash once you factor in actual financing costs. A property with a great cap rate in cash might still produce negative cash flow with a mortgage. The calculator does all three simultaneously.