$
$
Typically 20–25% for investment properties
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$
Principal + interest only
$
$
Taxes, insurance, management, HOA, etc.
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Budget 1–2% of property value annually
%
Typical: 5–10% of annual rent
Cash-on-Cash Return
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💡 Rule of Thumb: Use the 1% rule as a quick filter — monthly rent should be ≥ 1% of purchase price. A $300k property should rent for $3,000+/month. Properties meeting this threshold are more likely to cash flow positively.
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Sources & Methodology
Cap Rate = NOI ÷ Purchase Price. Cash-on-Cash = Annual Cash Flow ÷ (Down Payment + Closing Costs). NOI = Gross Annual Rent × (1 − Vacancy%) − Annual Operating Expenses − Annual Maintenance. Cash Flow = NOI − Annual Mortgage Payments.
Key Rental Property Investment Metrics
Successful real estate investing requires understanding multiple return metrics. No single number tells the full story — use all of them together.
Cap Rate vs. Cash-on-Cash
Cap rate ignores financing — it measures the property's intrinsic income-producing ability. Compare cap rates across properties regardless of how they're financed. Cash-on-cash includes your mortgage and reflects actual cash return on invested capital — the metric that matters most to leveraged investors.
Investment Benchmarks
Cap Rate = NOI ÷ Purchase Price | Cash-on-Cash = Annual Cash Flow ÷ Cash Invested | Gross Yield = Annual Rent ÷ Purchase Price
Target benchmarks: Cap Rate 5–8%+ | Cash-on-Cash 8–12%+ | Gross Yield 10%+ | 1% Rule: Monthly rent ≥ 1% of purchase price
💡 Leverage Amplifies Returns: Putting 20% down on a 7% cap rate property can yield 15–20% cash-on-cash if the property cash flows after mortgage. This is why real estate investors use leverage — the property's earnings are amplified by the bank's money.
Frequently Asked Questions
What is a good ROI for a rental property?
Most investors target 8–12% cash-on-cash return, though 6–8% is acceptable in low-risk, high-appreciation markets. Cap rates above 5% are generally considered reasonable, with 8–10% being strong. High-appreciation markets like San Francisco often have 2–4% cap rates — investors accept lower current returns for future appreciation.
What is cap rate?
Cap rate (capitalization rate) = Net Operating Income ÷ Property Value. It measures return independent of financing. A 7% cap rate means buying all-cash earns 7% annually. Cap rate is the standard metric for comparing properties and markets, regardless of how the purchase is financed.
What is cash-on-cash return?
Cash-on-cash return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested (down payment + closing costs). It measures actual cash return on the cash you put in. For leveraged investors, this is typically the most practical and meaningful metric since it reflects what you actually earn on your out-of-pocket investment.
What expenses should I include?
Include: property taxes, insurance, property management (8–12% of rent), maintenance (1–2% of property value annually), vacancy (5–10% of annual rent), and HOA fees if applicable. Many beginners underestimate maintenance and vacancy — budget conservatively in both categories.
What is the 1% rule in real estate?
The 1% rule states that monthly rent should be at least 1% of the purchase price to generate positive cash flow. A $300,000 property should rent for $3,000+/month. This is a quick screening tool — not a guarantee of cash flow — but properties meeting this threshold are more likely to be profitable after expenses.
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