Calculate cap rate, cash-on-cash return, NOI, and gross yield
Taxes, insurance, maintenance, management
Return on investment (ROI) is the single most important metric for evaluating a rental property. It tells you how much money you're making relative to what you invested. But "ROI" actually encompasses several different calculations, each telling you something different about the deal.
Cap rate measures the relationship between a property's net operating income (NOI) and its purchase price. It answers the question: "If I paid all cash, what would my annual return be?"
Formula: Cap Rate = (Annual NOI / Purchase Price) × 100
A cap rate of 5-8% is generally considered good for residential rental properties. Markets like the Midwest and Southeast tend to have higher cap rates, while coastal markets like California and New York typically have lower cap rates but more appreciation potential.
This is arguably more useful than cap rate because it factors in your actual mortgage and measures the return on your cash invested — not the full property value.
Formula: Cash-on-Cash = (Annual Cash Flow / Total Cash Invested) × 100
Most investors target 8-12% cash-on-cash returns. Below 5% and you're barely beating a savings account. Above 15% and you should double-check your numbers.
GRM tells you how many years of gross rent it would take to pay off the purchase price. Lower is better. Under 15 is generally good; under 10 is excellent.
Formula: GRM = Purchase Price / Annual Gross Rent
A common mistake is underestimating expenses. Your monthly expense estimate should include: property taxes, insurance, maintenance (budget 1% of property value/year), property management (8-10% of rent if outsourced), HOA fees, vacancy reserve (5-10% of rent), and capital expenditure reserve (5-10% of rent for roof, HVAC, etc.).
As a rule of thumb, total operating expenses typically run 35-50% of gross rental income. If your estimate is under 30%, you're probably forgetting something.
Our AI assistant can run the numbers, compare to market averages, and give you a straight answer on whether a property is worth buying.
Try VerticalRent Free