Question 1

What is a good rental yield for an investment property?

Accepted Answer

A gross rental yield above 7% is generally considered strong for residential real estate. Net yield (cap rate) targets vary by market: urban coastal markets like NYC and San Francisco often have 3–4% cap rates because investors accept lower income in exchange for higher appreciation potential. Secondary cities and Midwest markets often yield 6–9% net. As a rule, a cap rate above 5% in any market provides reasonable cash flow, while below 4% relies heavily on appreciation to generate returns.

Question 2

What is the difference between cap rate and cash-on-cash return?

Accepted Answer

Cap rate measures net operating income as a percentage of the total property value, assuming an all-cash purchase — it is a property-level metric independent of financing. Cash-on-cash return measures annual pre-tax cash flow as a percentage of actual cash invested, including the effect of a mortgage. A property with a 6% cap rate might generate a 10% cash-on-cash return if financed with a 30% down payment and positive leverage (where the cap rate exceeds the mortgage cost).

Question 3

What expenses should I include in a rental property analysis?

Accepted Answer

A complete rental property expense analysis includes: property taxes, landlord insurance, ongoing maintenance (budget 1% of value annually), capital expenditure reserves (1% for roof, HVAC, appliances), property management fees if applicable, vacancy allowance (5–8% of annual rent), and HOA fees if applicable. Many rookie investors forget maintenance reserves and vacancy — underestimating expenses by 30–40% is the most common reason rental properties underperform expectations.

Question 4

How do I use the 1% rule for rental properties?

Accepted Answer

The 1% rule states that a rental property's monthly rent should be at least 1% of the purchase price to generate adequate cash flow. A $200,000 property should rent for at least $2,000/month. This rule is a quick screening filter, not a complete analysis — it does not account for expenses, local vacancy rates, or appreciation potential. In high-cost coastal markets, the 1% rule is virtually impossible to meet, which is why many investors use gross yield or cap rate instead.

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