Evaluate a rental property investment with cap rate, cash-on-cash return, monthly cash flow, and the 1% rule check.
Monthly cash flow
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Cap rate
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Cash-on-cash return
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Annual NOI
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Cash invested
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Monthly mortgage P+I
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Operating expense ratio
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What these four numbers actually tell you
A rental deal lives or dies on four figures, and this tool surfaces all of them at once. Cap rate measures the property as if you paid cash, so it lets you compare a duplex in Ohio against a condo in Phoenix on equal footing. Cash-on-cash return folds in your financing and tells you what the actual dollars you put down are earning. Monthly cash flow is the number that hits your bank account. And the 1 percent rule is a 10-second sniff test you apply before you ever open a spreadsheet. The trap is reading any one of them alone. A property can post a healthy cap rate and still bleed cash every month once a 7 percent mortgage is layered on top, which is exactly what the default inputs show.
Net operating income, or NOI, is the engine under cap rate. It is your effective rent (gross rent reduced by your vacancy assumption) minus every operating expense except the mortgage. Taxes, insurance, maintenance, management, and miscellaneous costs all count. Debt service does not, because NOI is meant to describe the asset, not your loan. Once you subtract the mortgage principal and interest from NOI, you get cash flow.
Running the default deal at 7 percent money
Take the values the calculator loads on open: a $250,000 property, $50,000 down, a 30-year loan at 7 percent, $2,200 monthly rent, an 8 percent vacancy allowance, and the usual carrying costs. Here is how the tool walks from rent to the bottom line.
| Step | Monthly amount |
|---|---|
| Gross rent | $2,200 |
| Less 8% vacancy, effective rent | $2,024 |
| Operating expenses (tax, insurance, maintenance, management, other) | $796 |
| Monthly NOI | $1,228 |
| Mortgage principal and interest | $1,331 |
| Cash flow | a shortfall of $103 |
Annualize the NOI and you get $14,733, which against the $250,000 price is a 5.89 percent cap rate. That is a respectable cap rate. Yet the deal still runs a $103 monthly shortfall, so cash-on-cash comes in slightly negative on the $58,000 you have invested. This is the lesson hiding in a normal-looking property: at 7 percent borrowing costs, a 5.9 percent cap rate is not enough to carry the debt. The chart below shows where each rent dollar goes.
The 1 percent rule, and why it is only a screen
The default rent of $2,200 on a $250,000 price works out to 0.88 percent, so this property fails the 1 percent rule. The rule asks for monthly rent of at least 1 percent of the purchase price, which here would mean $2,500. Failing it is not a verdict. Plenty of properties in appreciating coastal and Sun Belt markets never hit 1 percent and still build wealth through equity growth and rising rents. Treat the rule as a filter that tells you which listings deserve a full underwriting pass, not as a buy signal. Here is the line I hold to: if a deal fails the 1 percent rule and also shows negative cash flow at current rates, you are betting entirely on appreciation, and you should size that bet honestly.
The operating expense ratio of 39 percent is worth a glance too. For a single-family rental, 35 to 45 percent of effective rent going to operating costs is normal once you fund management and a real maintenance reserve. If your inputs produce a 20 percent ratio, you are almost certainly understating repairs or capital expenditures, and your cash flow is fiction.
Does this tool account for depreciation or tax benefits?
No, and that is deliberate. Cap rate and cash-on-cash are pre-tax operating metrics. Real estate also throws off a paper depreciation deduction, residential buildings are written off over 27.5 years on Schedule E, that can shelter some of the cash flow from income tax. Passive activity loss rules under the tax code can limit how much of a loss you deduct against ordinary income in a given year, with a special allowance that phases out at higher incomes. Those effects can turn a small cash shortfall into a roughly break-even after-tax position, but they are a separate analysis from the operating return this calculator reports.
Why is the cap rate the same whether I finance or pay cash?
Because cap rate intentionally ignores your loan. It divides NOI by purchase price, and NOI excludes mortgage payments, so two investors buying the identical property at the same price see the same cap rate even if one pays cash and the other puts 20 percent down. Financing shows up in cash-on-cash return instead. That is why you compare properties on cap rate but compare your own outcomes on cash-on-cash.