Rental property is the most searched-for real estate calculation, and for good reason: a rental that looks fine on paper can quietly cost you money every month. Three numbers tell you most of what you need: monthly cash flow, cap rate and cash-on-cash return.
01How to calculate rental cash flow
Cash flow = rent − mortgage − property tax − insurance − HOA − reserves. The reserves are the part most beginners skip: vacancy (about 5%), management (8–10%), repairs (about 5%) and capital items like roofs and HVAC (about 5%). That is 20–30% of the rent set aside every month even if nothing breaks.
02A worked example
Price $180,000 with 25% down at 7% for 30 years: the mortgage is about $898 a month. Rent $1,750. Taxes $3,200 and insurance $1,400 a year (about $383 a month). Reserves at 23% of the rent: about $403. Cash flow: $1,750 − $898 − $383 − $403 = about $66 a month. Positive, but thin.
03What is a good cash flow per door?
Many investors want $200–300 a month per single-family house after all reserves. Below that, one repair can wipe out a year of profit.
04Cap rate: comparing properties
Cap rate = net operating income (rent minus operating costs, before the mortgage) ÷ price. In the example the yearly net operating income is about $11,570, so the cap rate is about 6.4%. Cap rate lets you compare properties as if you paid cash. It also prices a deal: value = net operating income ÷ the cap rate you want.
05Cash-on-cash return: your money's return
Cash-on-cash = yearly cash flow ÷ the cash you put in. In the example the investor puts in $45,000 down plus about $5,400 of closing costs. $66 × 12 ÷ $50,400 = 1.6%. That tells you the deal needs a lower price or more rent.
06The highest price for your target
Work backwards: what price gives you $200 a month? The rental cash flow calculator solves it: about $153,000 in this example. That is your offer ceiling.
07The 1% rule and the 50% rule
- 1% rule: monthly rent should be at least 1% of the price. A ten-second filter; it ignores interest rates.
- 50% rule: over time, operating costs eat about half the rent. Useful to screen, not to buy.
08Check the lender's view too
Lenders look at DSCR: rent ÷ (mortgage + taxes + insurance + HOA). In the example it is 1.37, which most DSCR lenders accept. The rental calculator shows it next to the cash flow.
09Where good rentals come from
Tired landlords and long-time absentee owners often sell rentals below retail. LeadCounty finds them in county records every week.
Run your rental through the free rental cash flow calculator: cash flow, cap rate, cash-on-cash, DSCR, the 1% rule and your maximum price on one screen.
