How to Analyze a Rental Property (Cap Rate & Cash-on-Cash)

A rental property is only as good as its numbers. Before you fall for the kitchen, run these calculations — they separate a cash-flowing asset from a money pit.

Start with Net Operating Income (NOI)

  Gross rental income (yearly)
  − Vacancy allowance (e.g. 5%)
  − Operating expenses (taxes, insurance, repairs,
    management, HOA — NOT the mortgage)
  ─────────────────────────────────────────
  = NET OPERATING INCOME (NOI)

Cap rate — the property's yield

  Cap Rate = NOI ÷ Purchase Price

  Example: $30,000 NOI ÷ $500,000 = 6.0% cap rate

Cap rate lets you compare properties independent of financing. What's "good" depends on your market.

Cash-on-cash — your actual return

This measures the return on the cash you put in, after the mortgage:

  Cash-on-Cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

  Annual cash flow = NOI − annual mortgage payments
  Total cash invested = down payment + closing + rehab

  Example:
    NOI ................... $30,000
    − Mortgage ........... −$21,000
    = Cash flow ........... $9,000
    ÷ Cash invested ...... $120,000
    = 7.5% cash-on-cash

Quick screening rules

The 1% rule — monthly rent ≥ 1% of purchase price is a rough first filter (hard to hit in pricey CA markets, but useful for comparison).
The 50% rule — operating expenses often run ~50% of rent over time; a fast sanity check.

These are screens, not decisions — always verify with real numbers.

Deal-analysis checklist

Used realistic market rent (not the listing's optimistic figure)
Included a vacancy allowance
Budgeted repairs + capital reserves (roof, HVAC, etc.)
Included property management even if self-managing (it's real labor)
Ran cap rate and cash-on-cash
Stress-tested at a higher vacancy / rate
Confirmed taxes (they can reset on sale) and insurance quotes

Resources

This is general education, not investment advice. Verify every number and consult a CPA on tax treatment before buying.