Question 1

What is a good cap rate for an investment property?

Accepted Answer

Cap rate benchmarks vary significantly by market and property type. In expensive urban markets, cap rates of 4–5% are common and considered acceptable. In secondary markets and smaller cities, investors typically expect 6–9%. Above 10% often signals higher risk (deferred maintenance, challenging tenants, or a declining area). A "good" cap rate depends on your required return and the local market — compare to other properties in the same neighborhood.

Question 2

What is the difference between gross and net rental yield?

Accepted Answer

Gross rental yield is annual rent divided by property value, expressed as a percentage. Net rental yield subtracts all operating expenses (property management, insurance, maintenance, vacancy allowance, rates, and taxes) before dividing by the property value. Net yield is the more meaningful number for comparing properties, but gross yield is useful for a quick scan because it requires only two numbers.

Question 3

What is cash-on-cash return and how does it differ from ROI?

Accepted Answer

Cash-on-cash return measures annual cash flow divided by the actual cash invested (down payment plus closing costs). It tells you the return on your out-of-pocket money, ignoring appreciation and mortgage paydown. ROI is broader and includes appreciation, equity build-up, and tax benefits. Cash-on-cash is the most useful metric for comparing the cash performance of leveraged investments.

Question 4

What expenses should I include when calculating net operating income (NOI)?

Accepted Answer

NOI = Gross Rental Income − Operating Expenses. Operating expenses include property taxes, insurance, property management fees (typically 8–12% of gross rent), maintenance and repairs (budget 1–2% of property value annually), vacancy allowance (typically 5–10% of gross rent), and any HOA fees. NOI does not include mortgage payments — it measures the property's income before financing.

Question 5

How do I evaluate whether a property will cash flow positively?

Accepted Answer

Start with gross annual rent. Subtract vacancy (typically 5–8%), then subtract all operating expenses to get NOI. Then subtract annual mortgage payments (principal + interest). If the result is positive, the property cash flows. A common quick filter is the 1% rule: monthly rent should be at least 1% of the purchase price. This is a rough screen, not a substitute for a full analysis.

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