The numbers that matter
Cap rate is net operating income (rent minus operating expenses, before the mortgage) divided by the purchase price. It describes the property itself, independent of financing, and lets you compare buildings.
Cash-on-cash return is the yearly cash flow after the mortgage divided by the cash you put in (down payment, closing costs, repairs). It describes your deal.
Gross Rental Yield is a quick first-pass metric that does not account for expenses or vacancy. Use it for initial screening only.
Break-Even Occupancy is the minimum occupancy rate needed to cover all expenses including the mortgage. Below this occupancy you lose money each month.
DSCR, the debt service coverage ratio, is NOI divided by the yearly mortgage payments. Lenders for investment properties usually want at least 1.2 to 1.25.
IRR is the yearly return that accounts for everything: your upfront cash, every year's cash flow and the equity you walk away with when you sell, after selling costs and the remaining loan.
NOI = rent × (1 − vacancy) − operating expenses
Cap rate = NOI / price
Cash-on-cash = (NOI − mortgage payments) / cash invested
What good looks like
Cap Rate: Typically 4 to 10%. Higher is better but reflects more risk or a less desirable location. In prime urban markets, 4 to 5% is common. In secondary markets, 7 to 9% is achievable.
Cash-on-Cash Return: Most investors target 6 to 12% CoC. Below 6% is considered weak; above 12% is excellent and usually signals above-average risk or a below-market purchase.
Price-to-Rent Ratio: The purchase price divided by annual gross rent. A ratio below 15 generally favours buying; 15 to 20 is neutral; above 20 often favours renting.
With mortgage rates around 7%, many US rentals bought with 20% to 25% down show thin or negative cash flow in year one. Investors then rely on rent growth, loan paydown and appreciation, which the IRR captures. The "Where the return comes from" chart separates those sources so you can see how much of the return depends on prices rising.
Typical operating expenses
| Expense | Typical | Notes |
|---|---|---|
| Property Tax | 0.5 to 2.5% of value/yr | Varies widely by state and county |
| Insurance | 0.5 to 1.5% of value/yr | Landlord policy required, not homeowner |
| Maintenance and Repairs | 1% of value/yr | Rule of thumb for ongoing repairs |
| Property Management | 8 to 12% of rent/mo | Plus lease-up fees; skip if self-managing |
| Vacancy | 5 to 10% of gross rent | Plan for at least one month empty per year |
| Capital Expenditure Reserve | 5 to 10% of rent/mo | HVAC, roof, appliances over time |
The 50% rule is a rough screen: operating expenses (everything except the mortgage) tend to eat about half of the rent over the long run. If a deal only works with expenses far below that, check your assumptions again.
Taxes on rental income
In the US, rental profit is taxed as ordinary income, but you can deduct mortgage interest, property tax, insurance, repairs and depreciation of the building (not the land) over 27.5 years. Depreciation often turns a positive cash flow into a paper loss. When you sell, depreciation taken is recaptured at up to 25%, and gains are taxed at capital gains rates unless you use a 1031 exchange. This calculator shows pre-tax figures.
Disclaimer: This calculator provides estimates for educational purposes only. Actual results depend on local market conditions, tenant quality, property condition and many other factors. Consult a real estate attorney, CPA and financial advisor before investing.