How to Analyze Rental Property Investments
Real estate investors use three key metrics to evaluate deals: Cap Rate shows property performance independent of financing, Cash-on-Cash Return measures your actual return on invested capital, and the 1% Rule is a quick screening tool for cash flow potential.
Key Investment Metrics
Cap Rate
NOI ÷ Property Value × 100. Shows the return you'd earn if paying all cash.
Cash-on-Cash Return
Annual Cash Flow ÷ Cash Invested × 100. Your actual return after mortgage.
1% Rule
Monthly Rent ≥ 1% of Purchase Price. Quick screening for cash flow potential.
Net Operating Income
Gross Rent - Operating Expenses. Foundation for Cap Rate calculation.
2026 Cap Rate Benchmarks
Capitalization Rate (Cap Rate) Data
What is it?
Capitalization Rate is a fundamental real estate investing metric used to evaluate the profitability and return potential of an investment property, independent of its financing method.
The Formula
How to calculate: Net Operating Income (NOI) ÷ Current Property Market Value
Industry Benchmarks
Frequently Asked Questions
A 'good' cap rate depends on the risk profile of the property. Lower cap rates (4-5%) typically indicate lower risk and higher property class (like prime urban real estate), while higher cap rates (8%+) indicate higher risk but greater cash flow potential.
No. Cap rate calculations intentionally exclude debt service (mortgage payments). It measures the property's unleveraged yield. To calculate returns including financing, investors use Cash-on-Cash Return instead.