Rental Property Investing: How to Analyze Your First Deal
How to calculate cash flow, cap rate, and cash-on-cash return for rental properties — with a realistic look at what numbers work.
The Key Rental Property Metrics
Gross Rent Multiplier (GRM): Purchase price ÷ Annual gross rent. A quick filter — lower is better. Under 10 is often considered reasonable in many markets.
Cap Rate: Net Operating Income ÷ Purchase Price × 100. NOI = Gross rent − All operating expenses (not including mortgage). Cap rate represents your return as if you paid cash. 5–8% cap rates are common in good rental markets.
Cash-on-Cash Return: Annual cash flow ÷ Total cash invested × 100. Accounts for financing. A 6–10% cash-on-cash return is generally considered acceptable.
The 1% Rule
A quick initial screen: monthly rent should equal at least 1% of purchase price. A $200,000 property should rent for $2,000/month minimum. This rule is largely unachievable in expensive coastal markets but still useful in Midwest/Southeast markets.
Accounting for All Expenses
Beginning investors consistently underestimate expenses. Budget for:
- Vacancy: 5–10% of gross rent (8–9% is realistic in most markets)
- Repairs and maintenance: 5–10% of gross rent or 1% of property value annually
- Property management: 8–12% of gross rent if not self-managing
- Capital expenditures: Roof, HVAC, plumbing replacement reserves — 5–10% of gross rent
- Insurance, property taxes, utilities (if applicable)
Total expenses typically run 40–50% of gross rent (the 50% rule is a common heuristic for estimation).