- 1
Estimate gross annual income
Add up the property's yearly rent plus any other income such as parking, storage, or laundry. Use realistic market rents, not the seller's best-case numbers.
- 2
Total the operating expenses
Add annual costs: property management, maintenance, insurance, property taxes, utilities you pay, and a vacancy allowance. Exclude the mortgage — that comes later.
- 3
Calculate net operating income (NOI)
Subtract operating expenses from gross income. NOI is the property's income before financing and income taxes, and it drives most other metrics.
- 4
Calculate the cap rate
Divide NOI by the purchase price. The cap rate lets you compare this property's unleveraged yield against similar listings in the same market.
- 5
Model the financing and cash flow
Apply your down payment, interest rate, and loan term to find the annual mortgage payment, then subtract it from NOI to get annual pre-tax cash flow.
- 6
Calculate cash-on-cash return
Divide annual cash flow by the cash you invested (down payment plus closing costs). This is the return on the money you actually put into the deal.
Run the numbers
Each step maps to one of our free calculators. Use the cap rate calculator for steps 1–4, the cash-on-cash return calculator for steps 5–6, and the property tax calculator to estimate the property-tax line in your expenses.
Keep your assumptions conservative
The math is only as good as the inputs. Use market rents rather than the seller's projections, budget for vacancy and capital expenses, and stress-test the deal at a higher interest rate or lower rent. A property that still cash-flows under cautious assumptions is far safer than one that only works in a best-case scenario. For more on reading the output, see what is a good cap rate and cash-on-cash return vs cap rate.
Frequently asked questions
What is the 1% rule for rental property?
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The 1% rule is a quick screen suggesting a rental's monthly rent should be at least 1% of its purchase price — for example, $2,000 rent on a $200,000 home. It is a rough filter, not a substitute for calculating NOI, cap rate, and cash-on-cash return.
What expenses should I include when analyzing a rental?
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Include property management, repairs and maintenance, insurance, property taxes, any utilities you cover, and a vacancy allowance. Many investors also set aside reserves for capital expenses like roofs and HVAC. These operating expenses are subtracted from income to find NOI.
How do I know if a rental property is a good deal?
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Compare the property's cap rate to similar local listings, confirm the cash-on-cash return meets your target after financing, and make sure projected cash flow stays positive under conservative rent and vacancy assumptions. No single number decides it — review them together.
This guide is for educational purposes only and is not financial or investment advice.