Rental Property Numbers: Cap Rate and Cash Flow in Plain English
Published · 2 min read
Cap rate and cash flow explained like a person: what the numbers mean, a full worked example on a $200K rental, and the expenses sellers hope you will not notice.
Two numbers decide whether a rental is a business or a hobby: cap rate (how good the asset is) and cash flow (how good your month is). Everything else is decoration.
Cap rate: the property's grade
Cap rate = net operating income ÷ purchase price.
Net operating income (NOI) is rent minus every operating expense — and critically, not the mortgage. That is the point: cap rate lets you compare a duplex in Ohio to a triple-net retail unit in Texas without caring how either was financed.
- Under 5%: you are buying appreciation, not income
- 5-8%: normal for most US residential markets
- 8%+: usually higher risk, older stock, or a weaker market
- 12%+: something in the listing is wrong, or you are in a distressed market
Cash flow: your month
Cash flow = NOI − mortgage payment. This is the number that pays you.
A worked example on a $200,000 rental
| Line | Monthly | Notes |
|---|---|---|
| Rent | $1,900 | |
| Vacancy (5%) | −$95 | One empty month every 20 |
| Property tax (1.2%/yr) | −$200 | |
| Insurance | −$125 | Landlord policy, not homeowner |
| Maintenance (8% of rent) | −$152 | The line everyone forgets |
| Property management (8%) | −$152 | Even if you self-manage, price it in |
| NOI | $1,176 | |
| Mortgage ($160K, 6.5%, 30yr) | −$1,011 | 20% down |
| Cash flow | $165 |
Cap rate: $14,112 ÷ $200,000 = 7.1%. Cash-on-cash return: $1,980 ÷ $40,000 invested = 5.0%.
The expenses sellers leave out
- Vacancy — even great tenants leave. 5-8% is realistic for a single family.
- Maintenance and capex — a roof, a furnace, and a floor are not optional. Budget 8-12% of rent, and keep capex separate from repairs.
- Management — self-managing saves cash and costs weekends. Price it in anyway.
- Turnover — repaint, cleaning, and a month empty every two to three years.
- Taxes reassessed after sale — the seller's tax bill is not your tax bill.
If a deal only works with 0% vacancy, $0 maintenance, and no management, it does not work.
The verdict rule I use
Under 6% cap rate with negative cash flow: pass, unless you have a specific forced-appreciation plan. 6-8% with positive cash flow: worth a spreadsheet. Above 8% with positive cash flow: look hard at why it is still on the market.
Model your own deal — vacancy, management, maintenance included — with the rental property calculator before you make an offer.
Use these tools to get started
- Rental Property Cash Flow Analyzer — Run the numbers on any rental — cap rate, cash-on-cash return, and real monthly cash flow after the mortgage. (Free)
- Business ROI & Payback Calculator — Plug in any investment — ads, software, equipment, a hire — and see ROI %, payback period, and a plain-English buy-or-skip verdict. (Free)
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