Net operating income (NOI)
NOI = effective rental income − operating expenses (property tax, insurance, HOA, maintenance, management, vacancy). It deliberately excludes your mortgage, so it measures the property's income power independent of how you finance it. NOI is the foundation for cap rate and DSCR.
Cap rate (capitalization rate)
Cap rate = NOI ÷ purchase price. It's the unleveraged yield — what the property returns if you paid all cash. Because it ignores financing, it's the cleanest way to compare two properties. What's good? Roughly 5–8%+ depending on market: expensive, low-risk metros trade at lower cap rates; cheaper or higher-risk areas at higher ones. A $300k property with $18k NOI has a 6% cap rate.
Cash flow
Cash flow = NOI − mortgage payments. This is the money that actually hits your bank account each month. At 2026's higher interest rates, plenty of listed deals are cash-flow negative with 25% down — which is exactly why running the numbers first matters.
Cash-on-cash return
Cash-on-cash = annual cash flow ÷ total cash invested (down payment + closing costs). Unlike cap rate, it reflects your financing and leverage. What's good? Many investors target ~8%+, but be honest: with today's mortgage rates, plenty of deals come in lower or negative. A deal needing $90k cash that throws off $6k/yr returns about 6.7% cash-on-cash.
DSCR (debt service coverage ratio)
DSCR = NOI ÷ annual mortgage payments. Lenders use it heavily — many want ≥ 1.20, meaning the rent covers the loan with 20% cushion. Below 1.0, the property doesn't earn enough to cover its own debt. DSCR loans for investors are priced off this number.
The 1% rule
1% rule: monthly rent ≥ 1% of purchase price. A $250k home would need ~$2,500/month rent to pass. It's a fast screen to filter listings, not a real analysis — in many 2026 markets almost nothing passes, so treat it as a starting filter and rely on cap rate and cash flow for the actual decision.
Gross rent multiplier (GRM)
GRM = price ÷ gross annual rent. A quick comparison metric — lower is better. A $300k property renting for $30k/year has a GRM of 10. Useful for rapidly ranking a list of properties before deeper analysis.
Put it together
No single metric decides a deal. Cap rate compares properties fairly; cash-on-cash reflects your actual leveraged return; cash flow and DSCR tell you whether it survives month to month. The rental ROI calculator computes all of them at once so you can see the full picture and stress-test your assumptions.
FAQ
What is a good cap rate for a rental property?
Roughly 5–8%+ depending on market and risk. Lower in expensive, low-risk metros; higher in cheaper/riskier areas. It ignores financing, so it compares properties on equal footing.
What is a good cash-on-cash return?
~8%+ is a common buy-and-hold target, though at current rates many deals are lower or negative. It measures the cash return on the cash you actually invest.
What's the 1% rule?
Monthly rent should be at least 1% of price. A quick filter, not a full analysis — increasingly hard to hit in 2026 markets.