How to Analyze a Rental Property: Cap Rate & Cash-on-Cash Calculator
Master rental property analysis with cap rate and cash-on-cash return formulas. Learn to evaluate any investment property in minutes with real examples.
📊 TL;DR Quick Reference
Cap rate = NOI ÷ Purchase Price. Cash-on-cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested.
Use both: cap rate for asset yield; cash-on-cash for investor yield.
Essential Data Collection Checklist
Numbers to Gather
Property Costs
- ✓ Asking price / all-in cost (price + closing + initial rehab)
- ✓ Closing costs (2-3% of purchase price)
- ✓ Initial rehab/repair costs
- ✓ Inspection fees and due diligence costs
Financing Details
- ✓ Debt terms (rate, amortization, points)
- ✓ Down payment amount
- ✓ Loan fees and origination costs
- ✓ Private lending terms if applicable
Income Sources
- ✓ Market rent (verified comps)
- ✓ Conservative rent estimate
- ✓ Other income (parking, laundry, storage)
- ✓ Vacancy percentage (use 5% baseline minimum)
Operating Expenses
- ✓ Property taxes and insurance
- ✓ Maintenance (8–10% of rent typically)
- ✓ Management (8–10% of rent if hired)
- ✓ Utilities (if landlord-paid)
- ✓ HOA/condo fees
Key Formulas & Calculations
Step-by-Step Calculation Process
1. Gross Scheduled Rent (GSR)
Formula: Monthly Rent × 12
This is your maximum potential rental income
2. Effective Gross Income (EGI)
Formula: (GSR + Other Income) × (1 − Vacancy %)
Accounts for vacancy and additional income sources
3. Operating Expenses (OpEx)
Sum of: taxes, insurance, management, maintenance, utilities, HOA
Excludes debt service (principal and interest)
4. Net Operating Income (NOI)
Formula: EGI − OpEx
The property's income before debt service
5. Cap Rate
Formula: NOI ÷ All-in Price
Measures property return without financing
6. Annual Cash Flow (Pre-tax)
Formula: NOI − Debt Service (P&I)
Money left after all expenses and loan payments
7. Cash-on-Cash Return
Formula: Annual Cash Flow ÷ Total Cash Invested
Return on your actual cash investment
Worked Example (Conservative Analysis)
Sample Property Analysis
Property Details
- • Purchase Price: $300,000
- • Closing/Rehab: $15,000 → All-in Cost: $315,000
- • Monthly Rent: $2,400
- • Other Income: $50/month (laundry)
- • Vacancy Rate: 5%
Operating Expenses (Annual)
- • Property Taxes: $3,000
- • Insurance: $1,400
- • Maintenance (10%): $2,880
- • Management (8%): $2,304
- • Water/Sewer: $900
- Total OpEx: $10,484
Step-by-Step Calculation
- • GSR: $2,400 × 12 = $28,800
- • Other: $50 × 12 = $600
- • EGI: ($28,800 + $600) × 0.95 = $27,957
- • NOI: $27,957 − $10,484 = $17,473
- Cap Rate: $17,473 ÷ $315,000 = 5.55%
Financing & Cash-on-Cash
- • Loan: 20% down ($60,000), 30-year at 6.5%
- • Monthly P&I: ~$1,517 → Annual: $18,204
- • Cash Flow: $17,473 − $18,204 = −$731/year
- • Total Cash Invested: $60,000 + $15,000 = $75,000
- Cash-on-Cash: −$731 ÷ $75,000 = −1.02%
💡 Analysis Insight
Decent cap rate (5.55%) but negative cash-on-cash return (-1.02%). This suggests the price is too high for current financing terms, or rent/expenses need improvement.
Red Flags & Pro Tips
🚩 Red Flags to Avoid
- • Tax reassessment jumps: Verify with county/municipality
- • Insurance estimates: Never guess—get actual quotes
- • Zero vacancy assumptions: Always use minimum 5%
- • Seller's rent claims: Verify with actual lease and comps
- • Hidden fees: HOA special assessments, utilities
💡 Pro Tips
- • Stress-test scenarios: +1% interest, +10% expenses, −5% rent
- • Market research: Drive comps, talk to local agents
- • Conservative estimates: Better to be surprised positively
- • Multiple offers: Analyze several properties simultaneously
- • Exit strategy: Know your hold period and sale assumptions
Frequently Asked Questions
What is the difference between cap rate and cash-on-cash return?
Cap rate measures property performance ignoring financing (NOI ÷ Purchase Price). Cash-on-cash measures investor return with financing (Annual Cash Flow ÷ Total Cash Invested). Use both together for complete analysis.
Is the 1% rule still valid for rental properties?
The 1% rule (monthly rent = 1% of purchase price) should only be used as an initial screen. Always run a full pro-forma analysis with actual numbers to make investment decisions.
What is a good cap rate for rental property?
Cap rates vary by market and property type. Generally, 4-6% in expensive markets, 8-12% in lower-cost areas. Compare to local market averages and consider the risk-return profile.
🎯 Key Takeaways
- • Use both cap rate and cash-on-cash for complete analysis
- • Always verify rent comps and get actual expense quotes
- • Never assume 0% vacancy—use 5% minimum
- • Stress-test with higher expenses and lower rents
- • The 1% rule is just a screen—run full pro-forma analysis