Question 1

What is a good ROI for a rental property?

Accepted Answer

A good rental property ROI depends on your investment strategy. Cash-on-cash return of 6-10% is generally considered good for a leveraged rental property. Cap rates of 5-8% are typical in most US markets. Total ROI (including appreciation) of 10-15% annually is achievable in growing markets. The 1% rule (monthly rent ≥ 1% of purchase price) is a quick screening tool, though it is harder to achieve in high-cost markets. Always compare your expected ROI to alternative investments and account for your time managing the property.

Question 2

What is the difference between cap rate and cash-on-cash return for rental properties?

Accepted Answer

Cap rate = Net Operating Income ÷ Property Value -- it measures the unlevered return and ignores your financing. Cash-on-cash return = Annual Cash Flow ÷ Total Cash Invested -- it measures the actual return on your down payment and closing costs, accounting for mortgage payments. A property with a 7% cap rate might have a 5% cash-on-cash return if you financed 80% of the purchase. Cash-on-cash is more relevant for evaluating your actual equity return; cap rate is better for comparing properties regardless of financing structure.

Question 3

What expenses should I include in a rental property cash flow analysis?

Accepted Answer

Include all recurring operating expenses: property taxes, insurance, property management fees (8-12% of rent), maintenance and repairs (budget 1% of property value per year), vacancy allowance (5-10% of gross rent), HOA fees, utilities paid by landlord, and landscaping. Do NOT forget vacancy -- a common mistake is assuming 100% occupancy. Also budget for capital expenditures (roof, HVAC, appliances) separately from routine maintenance. The mortgage payment (principal + interest) is a financing cost, not an operating expense, but it directly affects your cash flow.

Question 4

What is break-even occupancy for a rental property?

Accepted Answer

Break-even occupancy = (Total Annual Expenses including mortgage) ÷ Gross Annual Rent × 100. It tells you the minimum occupancy rate needed to cover all your costs. For example, if your total annual costs are $24,000 and gross annual rent is $30,000, your break-even occupancy is 80% -- meaning you can afford up to 20% vacancy before losing money. A break-even occupancy below 75% indicates a financially resilient investment; above 90% means the property is very sensitive to vacancy.

Question 5

Should I use the 1% rule or 2% rule for rental property screening?

Accepted Answer

The 1% rule states that monthly rent should be at least 1% of the purchase price (e.g., a $200,000 property should rent for $2,000/month). The 2% rule is a stricter version used in lower-cost markets. These are quick screening tools only -- not substitutes for a full cash flow analysis. In high-cost markets (CA, NY, WA), the 1% rule is nearly impossible to achieve, so investors focus on appreciation instead. In the Midwest and South, the 1% rule is more achievable. Always run a complete analysis including all expenses before making a purchase decision.

Year	Property Value	Cash Flow	Equity	Total ROI
Yr 1	$360,500	-$8,988	$83,210	1.7%
Yr 2	$371,315	-$8,459	$96,938	4.3%
Yr 3	$382,454	-$7,912	$111,209	7.8%
Yr 4	$393,928	-$7,346	$126,049	12.4%
Yr 5	$405,746	-$6,761	$141,485	18.0%

Rental Property ROI Calculator

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Monthly Cash Flow

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5-Year Projection

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