Q: What is a good cap rate for a rental property?
Most investors treat a cap rate between 4% and 10% as reasonable, with 5-8% common for stable residential rentals in established markets. Higher cap rates usually signal higher risk or a less desirable location; lower cap rates usually signal a safer, more competitive market.
Q: What is the difference between cap rate and cash-on-cash return?
Cap rate measures net operating income against the full property value, ignoring financing. Cash-on-cash return measures actual annual cash flow (after mortgage payments) against only the cash you personally invested — down payment, closing costs, and repairs. Cash-on-cash is the more relevant number if you used a loan.
Q: How is net operating income (NOI) calculated?
NOI equals gross rental income, minus vacancy loss, minus operating expenses (property tax, insurance, maintenance, management fees, HOA). It excludes mortgage principal and interest, which are financing costs rather than operating costs.
Q: What is DSCR and why does it matter?
The Debt Service Coverage Ratio (DSCR) is net operating income divided by the annual mortgage payment. A DSCR above 1.0 means the propertys income covers its debt payments; most commercial and many residential investment lenders require at least 1.20-1.25x before approving a loan.
Q: What is the Gross Rent Multiplier (GRM)?
GRM is the property price divided by its annual gross rental income, before any expenses. It is a quick, rough screening tool — a lower GRM generally suggests a better-priced property relative to its rent, but it should never replace a full cap rate or cash-on-cash analysis.
Q: Does this calculator work in currencies other than US dollars?
Yes. All figures can be entered and displayed in US Dollar, Euro, British Pound, Indian Rupee, Australian Dollar, Canadian Dollar, Japanese Yen, UAE Dirham, or Singapore Dollar. Every ratio (cap rate, yield, cash-on-cash, DSCR, GRM) is currency-independent since it is a percentage or multiple, so the analysis is valid regardless of which currency you choose.
Q: Should I use the 1% rule or the 50% rule instead of these ratios?
The 1% rule (monthly rent should be at least 1% of price) and the 50% rule (operating expenses average roughly 50% of rental income) are fast mental screening shortcuts, not substitutes for a full analysis. This calculator gives you the precise cap rate, cash-on-cash return, and DSCR so you are not relying on rough approximations before making a purchase decision.
Q: How does vacancy rate affect my returns?
Vacancy rate reduces your effective gross income before expenses are subtracted. Even a modest 5% vacancy assumption meaningfully lowers NOI, cap rate, and cash-on-cash return compared to assuming full occupancy year-round, so it should never be left at zero unless the property is under a long-term guaranteed lease.
